Many employees who change jobs choose to roll their 401(k) accounts into IRAs rather than leave them in place or roll them into their new employer’s 401(k) plan. But rolling a 401(k) account into an IRA is a really bad idea. Here’s why:
Higher fees
In nearly all cases, employees will pay more in fees in an IRA account than a 401(k) account. IRA account investments are likely to be more expensive since access to only retail mutual fund share classes is generally possible. This is because most IRA accounts are too small to meet lower cost share class minimums. Most retirement plans are able to use the cheapest mutual fund share class: institutional. In addition, there are likely to be annual IRA account fees. Many IRA account holders will experience fees that are 100% or more higher than what they paid in their 401(k) plan.
Loss of protection in case of bankruptcy
Qualified retirement plan assets are not considered in a bankruptcy. IRA account assets are, and can be seized. This is a significant protection that doesn't cost a qualified retirement plan account holder anything. Keep in mind that no one plans on filing for bankruptcy. However, none of us can predict the future.
Loss of access to certain funds
Because it will likely be impossible for an IRA account holder to meet the minimums for many types of investments, there will be quite a few investment options that IRA account holders won't qualify for.
Lack of advice
In order to manage costs, an employee may decide to roll his/her account balance over to an IRA account at a discount brokerage firm. Most qualified plan account holders have access to professional advice, generally without charge, whenever they want it. Discount brokerage firms do not provide investment advice.
Loss of protection from creditors
If an individual is sued or subject to debt collection efforts, creditors do not have the right to attach to qualified plan balances. IRA account balances are not afforded the same protection. This is another no-cost form of retirement account insurance that is lost when balances are transferred to IRA accounts.
There are very few compelling reasons for employees to move retirement account balances from qualified retirement plan accounts. However, there are many investment advisers who encourage employees to do just that. Be sure you share the facts with your employees.
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.
Do you counsel departing employees about the options available to them with respect to their 401(k) accounts? Share your thoughts in the comments.
