A recent investigative report published by Bloomberg illustrates what can go wrong with 401(k) plan rollovers. Many employees who change jobs choose to roll their 401(k) accounts into IRAs rather than leaving them in place or rolling them into their new employers 401(k) plan. Rolling a 401(k) account into an IRA is generally a really bad idea, for the following reasons:
- Higher fees. Outside of those investors who have a 401(k) plan account with millions, it is likely that anyone who rolls money into an IRA account will pay a lot more in fees. IRA account investments are often 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 a problem 401(k) plans do not have. In addition, there are likely to be annual IRA account fees. Many IRA account holders experience fees that are 100% or more than what they paid in their 401(k) plan.
- Not only higher fees, but more fees. Brokerage firms are interested in generating transaction revenue. Generally, IRA rollover accounts held at brokerage firms incur transaction fees on purchases and sales. All 401(k) plan participants make purchases/sales and transfers without incurring any transaction costs.
- No 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.
- Bad advice. The key to good investment advice is objectivity. The typical IRA account holder has limited options to source objective investment advice. Advisers at large brokerage firms are conflicted because of their desire to generate fees by selling products that pay them well. Those mutual funds that provide investment advice arent objective because they are also asset managers. Very few independent advisers are willing to take on small balance business without charging substantial fees. Conversely, most retirement plan participants can receive objective investment advice from the adviser attached to their 401(k) plan for free.
- 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 may not be afforded the same protection.
Recent regulatory activity has emphasized the concerns many have regarding rollovers. FINRA has issued guidance to help investors with rollovers. The SEC has committed to review IRA sales practices due to conflict of interest concerns, and the IRS attacked abusive rollover practices in a recent ruling. Continue to advise your 401(k) plan participants that there are very few compelling reasons to remove 401(k) balances from qualified retirement plan accounts.
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC (lawtonrpc.com), an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at email@example.com or 414.828.4015.
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