Too Many Investment Accounts? Here’s How to Reduce the Clutter

Ivanna Hampton: Welcome to Investing Insights. I’m your host, Ivanna Hampton.

Investment accounts like 401(k)s can start to pile up the more you change jobs. And so can the number of investment providers you have relationships with. It could become a hassle to keep up with those tax-deferred accounts along with your IRA and taxable investing accounts. Those may also be held with different investment providers. How can you streamline all of it to reduce the clutter? Morningstar Inc.’s Director of Personal Finance Christine Benz explains how in this excerpt from her webcast—“5 Steps to Spring-Cleaning Your Investment Portfolio.”

3 Reasons Why Investors Should Streamline Their Accounts

Christine Benz: The first step in this process in terms of streamlining your portfolio is to take a hard look at all of your investment providers as well as your investment accounts. So, the advantages of doing so again gets back to reducing oversight, reducing your recordkeeping responsibilities. One is purely logistical, that you’ll have fewer passwords and portals to have to keep track of. That gets to be a pain if you have a lot of different investment providers and a lot of different accounts. Keeping those passwords safe and making sure that you have access to them gets to be a bit of a pain in the neck. So, it’s helpful to reduce the number of investment providers. And it simplifies tax season, as I said.

And then one factor that I think probably doesn’t get enough play is that if you are able to have accounts sitting side by side, it really expedites the transfer process. An example would be: I’m someone who is still in accumulation mode for retirement, so I have my taxable account sitting right alongside my IRA accounts. When the calendar page turns, and I’m able to make an IRA contribution for the new tax year, it’s as simple as just a couple of mouse clicks and I’m able to transfer money from our taxable account right into those IRAs.

So, it helps when you’re in the accumulation mode, and it also helps when you’re in the decumulation mode. If you’re drawing down your portfolio during retirement, and you want to periodically transfer from your tax-deferred accounts or perhaps you’re on the hook for required minimum distributions, it’s helpful to have those accounts sitting side by side where your tax-deferred account is sitting right alongside your taxable account, and you can periodically do those transfers. Just a logistical advantage to having fewer providers and fewer investment accounts and, to the extent that you have multiple investment accounts, having them siloed with a single provider.

How Low Can You Go With Retirement Accounts?

The question is “How low can you go in terms of reducing the number of investment providers and the number of accounts?” Well, in terms of investment providers, you can go quite low. You could go all the way down to one, especially if you’re retired. If you are talking about investment accounts, there’s only so far you can go with this streamlining process. And the key reason is the tax code, that we all have multiple accounts that need to be kept distinct for tax reasons.

If you have traditional tax-deferred accounts that consist of pretax dollars that you’ve put in and investment earnings, these are funds that you’ve never paid taxes on, so they need to be kept separate. And you might have Roth IRAs. Increasingly, younger investors have more dollar amounts in Roth accounts, but those Roth accounts need to remain distinct from your traditional tax-deferred accounts. And then if you’re part of a married couple, well, those accounts that you each own in your own names for your own retirement, they need to remain distinct as well. So, some of those retirement accounts have to remain distinct due to the tax code.

The same goes for single-purpose tax-sheltered accounts. College savings plans, 529 assets, for example, can’t be rolled into your IRA. Health savings accounts need to remain distinct. And the same goes for taxable accounts. So, there’s only so much consolidation that you can do at the account level, but you can still do some consolidation.

How You Can Consolidate Tax-Deferred Accounts

One of the key opportunities if you’re looking to streamline is to look at all of the traditional tax-deferred accounts that you hold. And I mentioned that the typical worker has 12 jobs, so many people have leftover 401(k)s perhaps left behind at the old company, or they have rollover IRAs at various firms. These accounts together represent a major consolidation opportunity, where oftentimes the best strategy from the standpoint of streamlining is to consider merging all of those accounts together into a single mega IRA. And that makes it super simple to keep tabs on that account, which in many households is the largest account and allows you to silo that account with a single investment provider.

So, at the top of the list, I would take a look at all of the various traditional tax-deferred accounts, make sure that you don’t leave any behind because there are oftentimes smaller accounts that people forget about. Really think back to your employment history and make sure that you’re accounting for all of those traditional tax-deferred holdings.

Consolidate Retirement Accounts With the Same Provider

You can do the same with Roth accounts, where if you have multiple Roth IRAs, you can consolidate them together, collapse them into a single Roth IRA, ideally with the same firm where you’re holding your traditional tax-deferred assets. And the same goes for various taxable accounts. Maybe you have smaller onesie holdings here and there. That’s a great opportunity to consider merging those together.

As a side note, I would just say that if you’re doing a direct transfer of holdings into another provider, you wouldn’t typically trigger any tax implications. So, you just want to have those providers do a direct transfer to one another. You don’t want to take possession of a check, for example. You’d want to just have that transition be fairly seamless. So, this shouldn’t entail any tax consequences at this point.

I do want to make a note. I mentioned that oftentimes, especially with those company retirement plan assets, the old rollover IRAs, often creating a supersize IRA is a great course of action. But there are a couple of reasons why you’d want to think twice about this. Ideally, you would get some advice from a financial advisor before proceeding.

But a couple of reasons to consider leaving assets behind in a company retirement plan and potentially even rolling assets into that company retirement plan: One would be if for whatever reason you need extra creditor protections. Oftentimes company retirement plans are covered by better creditor protections than is the case for IRAs. And this depends on the state where you live and the laws in place in the state where you live. But check that if creditor protections are a concern. Another consideration would be if for whatever reason you have a gold-plated 401(k). Maybe it’s ultralow cost where you have very few administrative expenses. You have super cheap funds in the plan. Maybe you even have some custom funds that you really like. Those are considerations to potentially leaving assets behind in the company retirement plan or even rolling assets into the plan.

One other consideration would be if there are investment types that you just can’t find in the context of an IRA. So, a really big category would be what are called stable-value funds, which typically offer higher yields than you can earn on a money market mutual fund or on a high-yield savings account. But they have some insurance coverage that essentially stabilizes their net asset values. Those can be attractive investment types for people to bring into retirement, especially.

Another fund type that is specific to people who are covered by the Thrift Savings Plan for US government workers would be what’s called the G Fund, which is kind of a cashlike account. So, it guarantees stability of principal, but it offers a bondlike yield. The G Fund is really a gem in the Thrift Savings Plan lineup, and the Thrift Savings Plan is great overall. So, if you are a government worker and you are looking for safety but a higher yield than what is available on a cash account, oftentimes it’s a potential reason to think about staying in the TSP, rather than pulling the money out and moving it into an IRA. So just some considerations to bear in mind before you really take this mega IRA idea to heart.

The Week Ahead in Markets

Hampton: We’re trying something new on Investing Insights. We’re going to give you the markets brief for the week ahead.

Here’s next week’s rundown: Three retailers are expected to reveal what’s going on with consumer spending: Lowe’s is scheduled to report its second-quarter earnings on Tuesday, Aug. 20. Target is set to follow on Wednesday, Aug. 21. Macy’s is due to update investors on that date as well.

Here’s What to Expect From Macy’s Upcoming Earnings

Now, let’s take a deeper look at the New-York based retailer ahead of earnings. Macy’s is working on revitalizing its brand and lifting sales. It recently rejected a takeover offer from activist investors who wanted to take the company private. It has shifted back to its turnaround plan where a focus on luxury is part of the strategy. I spoke with David Swartz, a senior equity analyst for Morningstar Research Services, about the company.

Thanks for being here, David.

David Swartz: Thank you for having me.

What Investors Want to Hear From Macy’s CEO

Hampton: So let’s start with Macy’s is scheduled to report next week. What updates are you hoping to hear from CEO Tony Spring and his team?

Swartz: Tony Spring took over CEO earlier this year, and he unveiled a new program called Reinvent. It’s Macy’s third major strategic plan really in the last few years. And Macy’s is probably going to give us an update on how the Reinvent plan is going. Reinvent is based on a few major endeavors. Macy’s is trying to increase its sales of luxury products and its sales through its subsidiaries, Bloomingdale’s and Blue Mercury. Macy’s is also closing some underperforming stores, but investing more into its better stores to try to make them more productive and draw more customers.

What Tanked Arkhouse Management and Brigade Capital Management’s Offer to Macy’s

Hampton: Macy’s said Arkhouse Management and Brigade Capital Management, their takeover offer came with uncertainty and they turned it down. What tanked that offer, and do you think Macy’s made the best decision?

Swartz: Originally, Arkhouse and Brigade offered $21 a share for Macy’s last year. Macy’s was hesitant to sell to the group or in fact even deal with them at all because Macy’s management was concerned that Arkhouse and Brigade were mostly interested in monetizing Macy’s real estate rather than fixing its retail operations. Over the last few months, Macy’s did make an effort to work with the group and gave them access to due diligence information. Eventually, Arkhouse and Brigade increased their offer to $24.80 per share, which is close to our $25 per share fair value estimate. However, Macy’s then decided that it was going to terminate discussions because it was concerned that the group did not have the financing in place to actually close the acquisition.

Macy’s Is Focusing on Luxury Sales

Hampton: Now, you mentioned earlier about the focus on Bloomingdale’s and Blue Mercury stores, and these are luxury locations, and that Macy’s is looking to close underperforming stores. Who’s the shopper that Macy’s is hoping to attract and why?

Swartz: Macy’s has been struggling for many years, and one of the reasons is that middle-income shoppers have a lot of other places to shop, and Macy’s is really designed as a mall-based store for middle-income consumers. And so Macy’s is hoping that if it increases its sales to higher-income consumers by increasing its luxury sales, it can perhaps go to a part of the market that isn’t quite as crowded and that it can stand out among its many other peers that sell apparel. And so Macy’s is trying to increase its sales through its subsidiaries, Bloomingdale’s and Blue Mercury.

Macy’s Stock Outlook Ahead of Earnings

Hampton: Now, what’s your outlook on Macy’s stock ahead of them reporting earnings next week?

Swartz: Earnings probably will not be anything too spectacular. I’m expecting just a small profit of $0.30 a share in the quarter. But I think investors will be more interested in hearing what Macy’s has to say about the back-to-school season and the holiday season. Those are important seasons for any retailer and certainly for Macy’s, as a retailer that sells a lot to parents. The back to school season, the holiday season are very important. And so I think we’re going to get some more information on the outlook for that. Also, we should get more information on how the Reinvent plan is going and how the remodels are going and Macy’s other efforts.

Hampton: And what’s your outlook on the stock?

Swartz: Right now, I think Macy’s stock is undervalued. My fair value estimate is $25 a share, and Macy’s stock in the midteens I think is trading at a pretty low valuation.

Hampton: Well, everyone listening and watching, be sure to check out Morningstar.com next week to read David’s reactions to Macy’s earnings. Thank you for coming to the table, David.

Swartz: Thank you.

Hampton: That wraps up this week’s episode. Thanks for watching the show and making it a part of your day. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to Senior Video Producer Jake VanKersen and Associate Multimedia Editor Jessica Bebel. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.