Why rolling a 401(k) into an IRA is a bad idea

I believe that most of the time it does not make sense for your 401(k) plan participants to roll their 401(k) account balances into IRAs when they leave your employment. The reasons are many, as I have outlined previously here and here. In a recent article, Suzanne Woolley shared some new research and a number of additional reasons why 401(k) rollovers are a bad idea. Her thoughts and my comments follow.

No stable value funds

Most 401(k) plans offer stable value or guaranteed fund investment options as their safe choice, rather than money market funds. Money market funds yield little or nothing and probably will for some time to come. Stable value funds are paying around 1.5% in interest. For conservative investors or 401(k) participants close to retirement, access to stable value/guaranteed funds during this low interest rate period has been an absolute godsend. It is difficult, and most times impossible, to find stable value or guaranteed fund investment options available in IRA accounts. An investor’s safe investment option in an IRA rollover account will likely either be a money market fund, yielding close to nothing, or cash.

Also see: “Few employees aware of retirement transition benefits.”

Employers are fiduciaries

IRA account investors should be concerned about whether the investment options their broker is recommending benefit their broker more than the investor. It is likely that their broker is not acting as a fiduciary when making investment recommendations. That means the broker does not have to take their best interests into consideration. Therefore, any investment recommendations made tend to be good for the broker and for the brokerage firm, but may not be good for the investor. In a 401(k) plan, not only is the employer a fiduciary, but the investment adviser associated with the plan is likely to be one as well. Which approach do you think offers the better, safer investment opportunities?

Woolley cites a study from the Center for Retirement Research that shows that the average return in an IRA account from 2000 to 2012 was 2.2%. The average return in a 401(k) plan account for the same period was 3.1%. Although neither of these returns will allow anyone to retire any time soon, there is a huge difference between the two. The return 401(k) plan participants experienced was nearly 50% greater.

Higher fees

Do you think brokers advising IRA account investors are motivated to sell investments with higher fees? One of the main reasons cited in explaining why the return differential is so large between 401(k) plans and IRA accounts is because of the much higher fees IRA account investors pay.

Also see: “401(k) suits draw employee attention to fees, fiduciary duty.”

There are a lot of good reasons your employees should rollover their IRA accounts into your 401(k) plan and keep their balances in your plan when they leave your employment. During your next employee education session, ask your investment adviser to talk about some of them.