A recent investigative report published by Bloomberg illustrates what can go wrong with 401k rollovers. Many employees who change jobs choose 401k rollovers into IRAs rather than leaving their accounts with their old employers or rolling them into their new employer’s 401k plan. 401k rollovers into IRA accounts is generally a really bad idea, for the following reasons:
Why Rollovers Are A Bad Idea
1. Higher fees
Outside of those investors who have a 401k 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 401k 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 401k plan as a result of making 401k rollovers into IRA accounts.
2. 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 401k plan participants make purchases/sales and transfers without incurring any transaction costs.
3. 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.
4. 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 aren’t 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 advisor attached to their 401k plan – FREE!
5. 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 which may be found here, here and here. The SEC has committed to review IRA sales practices due to conflict of interest concerns, and the IRS has attacked abusive rollover practices in a recent ruling. Continue to advise your 401k plan participants that there are very few compelling reasons to remove 401k balances from qualified retirement plan accounts.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or email@example.com.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at: https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.