I believe that most of the time it does not make sense for your 401k plan participants to elect a 401k rollover into an IRA when they leave your employment. The reasons are many, as I have outlined previously here and here. Suzanne Woolley, in a recent Bloomberg Business piece, shared some new research and a number of additional reasons why a 401k rollover is a bad idea. Her thoughts and my comments follow.
Why 401k Rollovers Are Bad
No stable value funds
Most 401k 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 401k 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.
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 401k plan, not only is the employer a fiduciary, but the investment advisor associated with the plan is likely to be one as well. Which approach do you think offers the better, safer investment opportunities?
This is a stunner
Ms. Woolley, in her piece, 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 401k plan account for the same period was 3.1%. Although neither of these returns will allow anyone to retire anytime soon, there is a huge difference between the two. The return 401k plan participants experienced was nearly 50% greater.
401k rollover to an IRA = 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 401k plans and IRA accounts is because of the much higher fees IRA account investors pay.
There are a lot of good reasons your employees should rollover their IRA accounts into your 401k plan and not request a 401k rollover when they leave your employment. During your next employee education session, ask your investment adviser to talk about some of them.
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 firstname.lastname@example.org.
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 email@example.com 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.