There were a number of readers who had comments in response to
- Average 401(k) balance. My original story was written with the average 401(k) plan participant in mind. That participant, as of the first quarter 2013, had a 401(k) plan balance of around $80,000 (please email us if you would like the link to that source). Also, I should have mentioned that I am an advocate for 401(k) plan participants.
- Nowhere to go. Unfortunately there aren't many advisers who are eager to work with IRA rollover accounts that contain the average participant balance. As a result, these participants will either pay excessive fees to place their balances with the larger advisory firms, or work with discount brokerage firms or mutual fund companies where generally no investment advice is available.
- Objectivity: the key to good investment advice. The average 401(k) plan participant considering a rollover has limited options to source objective investment advice. Advisers at large brokerage are conflicted because of their desire to generate transaction fees and sell products that pay them well. Those mutual funds that provide investment advice aren't objective because they are also asset managers. Very few independent advisers are willing to take on small balance business without substantial fees. However, most retirement plan participants can receive objective investment advice from the advisor attached to their 401(k) plan – at no cost.
- Balances too small to meet minimums. Nearly all of the cheapest mutual fund share classes (I am thinking of the institutional share classes) have minimums far in excess of $80,000. Many are $1 million or more. As a result, the average 401(k) plan participant who rolls his balance into an IRA will often find himself using the most expensive share class – retail. Nearly all retirement plans use institutional share classes. The difference in cost can be 50 basis points or more.
- Transaction fees. Brokerage firms are interested in creating transactional revenue. As a result, not only is it likely that IRA rollover account holders are not receiving objective investment advice, but they are also probably incurring transaction fees for purchases and sales. Please keep in mind that most retirement plan participants have access to free, objective investment advice and the opportunity to make purchases/sales and transfers without any transaction costs. Also keep in mind that the average participant is not interested in rolling over their balance into a mutual fund family where no objective investment advice is available.
- Exceptions. There are exceptions to every rule. My original column was written to share information that most retirement plan participants should consider when thinking about rolling over their 401(k) account balances. Most plan participants are not interested in managing their own accounts without help. They are not adept at calculating cost comparisons and would not be well-served by paying the fees required in an IRA rollover account.
And I did make a misstatement in the original piece. It appears that IRA accounts do receive some protection in the case of bankruptcy. My apologies for that oversight.
As an advocate for retirement plan participants, I am concerned that very little of the information necessary to make a good rollover decision is shared with participants in a manner they can understand. As a result, I believe most participants make a bad decision when rolling over their 401(k) retirement plan accounts.
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.
