Convert SIMPLE to Roth? Advisor: Stay with American Funds

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Convert SIMPLE to Roth? Advisor: Stay with American Funds

Postby Nozzle » Thu May 09, 2013 8:27 pm

First off I want to thank you all for making this forum so practical and educational. When I first began saving for retirement I knew very little about investing. I started visiting this site a few months ago and have since become a believer in index funds, age-appropriate equities/bonds AA, the power of simplicity, and staying the course. My investment strategy is definitely beginning to evolve.

Now I’m 35 and all my retirement funds reside in an employer-sponsored SIMPLE IRA consisting of American Funds evenly split between AMECX & AGTHX (effective AA of 85/15).

Next month I’ll be changing to a new job that offers a 401(k) program. My initial research tells me this program is tied to an abysmal selection of actively managed funds. I still plan to contribute to the extent that my new employer will match. But instead of rolling over the SIMPLE IRA into the new 401(k), I’m thinking of opening a Roth at Vanguard and rolling over into that.

So I bring up the idea to my SIMPLE IRA plan advisor. He agrees that, in my particular case, converting to a Roth is worth considering. But he’s pushing me to stay with American Funds because 1) American charges no rollover fee when you stay with them, 2) my fund shares are already bought and paid for, 3) expenses are low for actively managed funds, and 4) I’d get to keep him as my advisor (!)

I’m curious what you all think about the logic of staying with American Funds in this scenario. Does this advisor’s suggestion have any merit or is he just trying to keep my business? I’d love to start up with Vanguard somehow and a Roth rollover seems like the best way to do it.
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby MN Finance » Thu May 09, 2013 8:40 pm

I would go to the place you think you'll be long term (probably not your advisor, but I don't know.) That said, if you do stay with the already purchased funds its not terrible. He makes very little to keep your business - you pay him indirectly 0.25% per year within the American funds. The "problem" will come when you decide to make a Roth contribution and you then have to decide if you add to your American funds and pay the commission or open another account at VG
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby tfb » Thu May 09, 2013 8:57 pm

Nozzle wrote:So I bring up the idea to my SIMPLE IRA plan advisor.

There's that saying about asking a barber if you need a haircut. The answer is obvious.
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby retiredjg » Thu May 09, 2013 8:59 pm

Nozzle wrote: But instead of rolling over the SIMPLE IRA into the new 401(k), I’m thinking of opening a Roth at Vanguard and rolling over into that.

If you roll into Roth IRA, you will have to pay tax on that money at your ordinary tax rate. That may or may not be your best choice. You should also consider rolling into traditional IRA to maintain the tax-deferred status of the money. There are several factors that determine which is best, none of which we know at this point.

But he’s pushing me to stay with American Funds because 1) American charges no rollover fee when you stay with them,

Does that mean there is a fee to rollover to some other custodian? Even if there is, you should probably just pay it.


2) my fund shares are already bought and paid for, 3) expenses are low for actively managed funds, and 4) I’d get to keep him as my advisor (!)

These 3 things are irrelevant. The last one is pretty funny.


I’m curious what you all think about the logic of staying with American Funds in this scenario. Does this advisor’s suggestion have any merit or is he just trying to keep my business? I’d love to start up with Vanguard somehow and a Roth rollover seems like the best way to do it.

If you stay with American Funds, you will continue to pay high expense ratios. There's no point in doing that. You don't lose anything by selling these funds. Well, you lose the high expense ratios....but what else is there to lose? Yes, he's just trying to keep your business. Can't really blame him for that, but his reasons, while true, don't amount to anything that should matter to you.
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby G-Money » Thu May 09, 2013 9:05 pm

IMO, yes, the advisor is just trying to keep your business. I don't blame him; this is how he makes his money.

Either you believe in low cost indexing, or you don't. If you want actively manage funds, you could do much worse than American Funds. But I (and nearly all Bogleheads) believe that low-cost index funds are better. So if given a choice, I would go with low cost index funds rather than American Funds.

As for the points raised by your advisor:

1. Most mutual fund companies don't charge a fee for rolling over an employer-sponsored plan to an IRA/Roth IRA. Some brokers are offering cash incentives for you to open an account with them. Fund companies and brokerages want to do everything they can to attract assets. So this is not an advantage inherent in American Funds.

2. If by "bought and paid for", your advisor means the loads have been paid, then that's true. But it's a sunk cost. Sunk costs are a silly reason to do anything. On the other hand, you will continue to pay expenses for the funds, and AF expense ratios are generally quite a bit higher than those of, say, Vanguard.

3. Yes, AF ERs are pretty low for active funds. But not nearly as low as Vanguard's. And the loads you'll end up paying for new contributions, will make the comparison to low cost index funds painful.

4. If his advice is to stick with AF (which, of course, he has a vested interest in you doing because he gets a cut of the loads and fees), then ditching this advisor would hardly be a loss for you. Most people here would say the term "advisor" in this context is a misnomer anyway; a more appropriate term might be "salesman."

Good luck.
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby xram » Thu May 09, 2013 9:09 pm

G-Money wrote:IMO, yes, the advisor is just trying to keep your business. I don't blame him; this is how he makes his money.

Either you believe in low cost indexing, or you don't. If you want actively manage funds, you could do much worse than American Funds. But I (and nearly all Bogleheads) believe that low-cost index funds are better. So if given a choice, I would go with low cost index funds rather than American Funds.

As for the points raised by your advisor:

1. Most mutual fund companies don't charge a fee for rolling over an employer-sponsored plan to an IRA/Roth IRA. Some brokers are offering cash incentives for you to open an account with them. Fund companies and brokerages want to do everything they can to attract assets. So this is not an advantage inherent in American Funds.

2. If by "bought and paid for", your advisor means the loads have been paid, then that's true. But it's a sunk cost. Sunk costs are a silly reason to do anything. On the other hand, you will continue to pay expenses for the funds, and AF expense ratios are generally quite a bit higher than those of, say, Vanguard.

3. Yes, AF ERs are pretty low for active funds. But not nearly as low as Vanguard's. And the loads you'll end up paying for new contributions, will make the comparison to low cost index funds painful.

4. If his advice is to stick with AF (which, of course, he has a vested interest in you doing because he gets a cut of the loads and fees), then ditching this advisor would hardly be a loss for you. Most people here would say the term "advisor" in this context is a misnomer anyway; a more appropriate term might be "salesman."

Good luck.



great point.
most certainly "salesman" .... not advisor
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby Robert C F » Thu May 09, 2013 10:24 pm

I moved my 401 to Vanguard IRA a couple of years ago and am happy I did. Lower fees, extremely better choices, and they have a "concierge" department that will walk you through the process.

I looked up your two funds on Morningstar, one is a large cap value and one is a large cap growth. So your asset allocation is all large cap equity which doesn't make a lot of sense to me. Your advisor may be a nice guy to chat with but if this is the best allocation he can suggest, you're not getting much useful advise from him. If you want to do all large cap equity, cheaper to just get an S&P index.

If you move your funds you may want to start in deciding your split between equity indexes and bond indexes. You can start with your age as percentage of bonds or read Ferri's book or Boglehead's book for more on asset allocation.
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby Default User BR » Fri May 10, 2013 2:46 pm

How much is in the SIMPLE? As noted, a number of custodians are offering bonuses for significant transfers. Even if you don't qualify, many will reimburse any transfer fees. Vanguard will not. However other custodians will have transaction fees for Vanguard funds. You can do a lot better if you are willing to use ETFs instead of mutual funds. TD Ameritrade has a good list of ETFs without fees, including most of the popular Vanguard ones.

As noted, AF products have relatively high ERs. Example, AIVSX (which I used to own) has an ER of 0.62%, with up to .23% of that as a 12b-1 fee. In case you don't know, that would go your "advisor". So you can see his vested interest. That fund is a large-cap that tilts somewhat to value. Its performance has been pretty similar to the Vanguard fund VIVAX, which has an ER of 0.24%


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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby Nozzle » Fri May 10, 2013 4:14 pm

Wow, thanks for all the great feedback!

There was a long email conversation between myself and this adviser. He really is a nice guy and seems knowledgeable. But all his reasons for staying with him and/or American Funds were debunked by your posts. If I were keeping the SIMPLE and never contributing to it again then that would be one thing. But I'd like to convert it to something I can contribute to and therein lies the problem -- buying new shares at a very high cost.

retiredjg wrote:If you roll into Roth IRA, you will have to pay tax on that money at your ordinary tax rate. That may or may not be your best choice. You should also consider rolling into traditional IRA to maintain the tax-deferred status of the money. There are several factors that determine which is best, none of which we know at this point.

I'll consult my CPA to help answer this question. I definitely want to convert to one or the other.

Default User BR wrote:How much is in the SIMPLE? As noted, a number of custodians are offering bonuses for significant transfers. Even if you don't qualify, many will reimburse any transfer fees.

Thanks (to you and others) for pointing out the transfer incentives. The SIMPLE is worth around $36K. Not sure what that might mean in the way of incentives.

G-Money wrote:Either you believe in low cost indexing, or you don't.

This is really what our conversation boiled down to. I understand that his job is to believe in actively-managed funds. But I have become a believer in low-cost index funds and so we will likely never see eye-to-eye on the subject. It's looking more and more like we'll need to part ways.
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby G-Money » Fri May 10, 2013 4:22 pm

Nozzle wrote:
Default User BR wrote:How much is in the SIMPLE? As noted, a number of custodians are offering bonuses for significant transfers. Even if you don't qualify, many will reimburse any transfer fees.

Thanks (to you and others) for pointing out the transfer incentives. The SIMPLE is worth around $36K. Not sure what that might mean in the way of incentives.

Here's a list of some of the discount brokers offering incentives. It was posted over a year ago, but appears to be up to date. Of course, you'll want to confirm the incentive is still being offered before opening the account.

http://thefinancebuff.com/huge-bonus-of ... -edge.html

Good luck.
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby Nozzle » Fri May 10, 2013 4:46 pm

G-Money wrote:Here's a list of some of the discount brokers offering incentives. It was posted over a year ago, but appears to be up to date. Of course, you'll want to confirm the incentive is still being offered before opening the account.

http://thefinancebuff.com/huge-bonus-of ... -edge.html

Thanks, G-Money! I checked out the list and, based on my holdings, it appears the most I would qualify for is a $100 bonus. Think I'd rather open with Vanguard since I'll probably recoup at least that amount in fee savings in a matter of months.
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby Default User BR » Fri May 10, 2013 5:20 pm

Were it me, I would go with TD Ameritrade for the $100, and switch to ETFs. If you don't want to mess with those, then it's not as good of a deal.


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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby G-Money » Fri May 10, 2013 5:25 pm

Agree with Default User BR. If you don't want ETFs, go straight to Vanguard. At most of those brokerages, there is a transfer out/closing fee regardless of how long you hold the account that would swallow up most of your $100 bonus anyway, so it wouldn't make sense to open an account there just to get the bonus and then move to Vanguard.
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby retiredjg » Fri May 10, 2013 5:57 pm

Nozzle wrote:
retiredjg wrote:If you roll into Roth IRA, you will have to pay tax on that money at your ordinary tax rate. That may or may not be your best choice. You should also consider rolling into traditional IRA to maintain the tax-deferred status of the money. There are several factors that determine which is best, none of which we know at this point.

I'll consult my CPA to help answer this question. I definitely want to convert to one or the other.

If you roll into a traditional IRA, there are no taxes. But if you need to use back door contributions to get money into Roth IRA, a traditional IRA would be in the way.

If you roll into a Roth IRA (convert the traditional money to Roth money) and if your bracket is 25%, you'll pay 25% of $36k ($9k) for federal taxes (and maybe more for state taxes) and that money really needs to come from savings, not from the SIMPLE IRA. I just did a quick and dirty calculation which assumes that you are not straddling the line between tax brackets or in some kind of phase out.

In general, if you are in a very low tax bracket (10% or 15%) converting to Roth is likely to be a good thing if you have the cash money to pay the taxes next spring. In general if you are in a high tax bracket (28% and up) converting to Roth is likely not to be a good thing. In the 25% bracket, opinions vary somewhat and more depends on things you have not told us yet (expected career path, pension, etc.)
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Re: Convert SIMPLE to Roth? Advisor: Stay with American Fund

Postby grabiner » Fri May 10, 2013 10:07 pm

Nozzle wrote:So I bring up the idea to my SIMPLE IRA plan advisor. He agrees that, in my particular case, converting to a Roth is worth considering. But he’s pushing me to stay with American Funds because 1) American charges no rollover fee when you stay with them, 2) my fund shares are already bought and paid for, 3) expenses are low for actively managed funds, and 4) I’d get to keep him as my advisor (!)


The funds are not "paid for". You may have already paid the load to buy the American Funds (if it wasn't waived for your A shares), but you are paying 0.25% a year in 12b(1) fees which continue to cover American's marketing and distribution expenses.

And that 0.25% is the difference between American Funds and other lower-cost funds; American's costs would actually be very low without that 12b(1) fee. The expense ratio for Growth Fund of America is 0.46% plus the 0.25% fee, while the expense ratio for the similar Vanguard US Growth is 0.45% (0.31% on a $50,000 investment). The expense ratio for Income Fund of America is 0.34% plus the 0.25% fee, while the expense ratio for the similar Wellington Fund is 0.25% (0.17% on a $50,000 investment)
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