7 Rollover Tips for Those with Money Still in Former Employer 401k Plans
It’s an age-old question that, depending on which way the DOL wind blows, may become a bit dicier. But we’ll leave that question hanging pending the final wording of the DOL’s proposed new Fiduciary Rule. In the meantime, the original question persists. Should former employees keep their money in their old company’s retirement plan or should they roll it over? And where should they roll it over? What are the rules of thumb that drive this decision?
We spoke with dozens of retirement plan advisers across the nation and asked them to tackle this question. We’ve boiled down the best answers into seven rollover tips.
One of the most often ignored factors in determining the appropriateness of rolling over money from your former employer’s 401k plan is whether you can trust you’ll always have access to that former employer. As time goes by, ex-employees tend to lose contact with their old job. This makes the issue of control far more important than people realize. Leaving your retirement money with the old firm introduces an unnecessary component of risk. “Most of my clients want better control of their money,” says Ron Tetley, President of Creative Retirement Planning, LLC, Akron, Ohio. “You only get that in an IRA so that becomes the best option.”
2) Obtain Outside Help:
The big drawback with 401k plans is that you’re limited in choosing a personal adviser. Even when individual advice is offered, you must choose from a short-list approved by the plan sponsor, not you. If you’re going to use outside help, you may as well seize control of that choice for yourself. That way you’ll insure you’re working with someone ideal for your own unique set of circumstances, not someone suited to the average demographic of the company retirement plan. David Born, President of Born Investment Management, LLC in Austin, Texas and Orinda, California, says, “If you are hiring someone to manage your assets or you can manage multiple accounts on your own, go with the IRA. You will have more control over the investments and costs. You will also have more options on the future of the account in your financial plan. IRAs offer more qualified, penalty free distribution options and the flexibility to roll over to a Roth IRA (which has even more flexibility!) any time.”
3) Double Check Your Benefits:
Don’t jump the gun and jump ship without conducting at least a modest amount of due diligence. For example, just because you’ve left the firm doesn’t mean membership in the former employer’s plan no longer provides perks you might like. “I you’ve decided to roll out of a former employer’s plan, make sure you’re not giving up any benefits by doing so,” says Ben Birken, of Woodward Financial Advisors in Chapel Hill, North Carolina. “For example, some employees at our local university enjoy withdrawals from their 401(a) plans that are exempt from state income tax. They lose that exemption if they rollover their 401(a) into an IRA. Similarly, university retirees who are vested in their 401(a) plans lose the benefit of having the state pick up the tab for its portion of retiree health coverage if they rollover their entire balance to an IRA.”
4) Compare Fees:
Economies of scale represents one of the biggest advantages in staying with an old firm’s 401k plan, particular with retirement plans for very large firms. These economies of scale can sometimes lead to negotiating lower fees that are simply not available elsewhere. Robin Solomon, a Benefits and Tax attorney (partner) at Ivins, Phillips & Barker in Washington, D.C. says, “The #1 rule of thumb when deciding whether to roll your money into your current employer’s 401k plan or an IRA is: Does the current employer or IRA offer better and cheaper investment options? If not, think twice before executing a rollover. In many cases, the funds available through an IRA will charge higher fees than the former employer’s plan. Higher fees will erode your investment return over time.”
Michael H. Simms, a Partner at Veracity Financial Services, Inc. Palm Beach Gardens, Florida, agrees. He says “The new employer’s plan had better have less administrative fees on the employee, and lower cost underlying investments. Cost. Costs. Costs.”
Many, however, fall prey to the common misconception that it is always less expensive to remain in an old company’s 401k plan. They overlook that ERISA plans are subject to costs that individual retirement plans do not have to pay. In many cases, these mandated overhead costs more than make up of any potential economies of scale savings. Born says, “If clients are hiring us to manage their money, we bring them over to an IRA. This way they don’t have to pay record-keeping and administrative fees associated with their plan and they can invest across the investment universe. A lot of clients invested in target date funds see their costs drop substantially when they roll over their accounts into an IRA.”
Not everyone agrees with this sentiment. Solomon says, “I would generally advise individuals: Don’t automatically roll over your account to an IRA when you leave a job. In many cases, the former employer’s plan will offer lower fees than an IRA. Lower fees will ultimately boost your rate of return. Employer plans generally offer a healthy mix of investment options as well.”
Birken takes a different tact. He says, “More often than not, we advise clients to rollover into an IRA. Most of the time, this results in lower ongoing portfolio expenses and a much more diversified portfolio than if they left assets in their old 401ks.”
Indeed, many experienced professionals have been able to identify less costly alternatives via rollovers versus staying in the plan. Bill Hammer, Jr., a financial adviser in Locust Valley, New York, says, “I recommend rolling over the old retirement plan. Most employer plans are very high-cost, so you’ll probably keep more over time if you put roll it over. Where to roll it over doesn’t matter too much as long as they don’t charge hefty account fees.”
The idea of an empirical fee analysis seems tailor made for the financial services expert. It offers a fairly quick way to demonstrate value. Simms says, “When reviewing the client’s current plan (in the 401k) we show them the impact of costs on their investments future. When we compare with similar investment funds outside of the 401k structure, the decision is pretty clear for the client. Less ‘Advising’ and more ‘Proving’.”
5) Know When You Want to Retire:
The age you intend to retire can have a greater impact on your decision than you might think. “The number one rule of thumb is to know when you want to retire and whether your investment options are giving you access to enough to different asset classes,” says Nick Vail of Integrity Wealth Advisors in Indianapolis, Indiana. “If you plan to retire pre-59 ½, it is likely a good idea to leave a least a portion in the 401k. If your investment options are too limited, an IRA can give you better access to a universe of funds/stocks/ etc. I most often advise that the client leave at least a portion in the 401k if they plan on retiring before 59 ½. If retiring after that age, I usually suggest rolling it into an IRA so we can better help them manage their household assets efficiently.”
6) Compare Investment Options:
You’d think this would be obvious, but then you’d be surprised. One of the major drawbacks with ERISA plans is the inability to purchase individual bonds (and, no, bond funds are not bonds). There are times when holding individual bonds is the preferred investment option. The impact of investment options is a critical consideration and one that needs to be addressed. Tetley says, “Will this move give you better access to better investment choices and help you to accomplish your goals and dreams.”
A simpler analysis involves whether you can continue to purchase the same mutual fund that’s in the old 401k plan. Jonathan Polson, portfolio Manager and Investment Adviser at SouthernTrust Wealth Management in Greenville, South Carolina, says, “The rule to remember is to make sure you can invest in similar funds that you currently are invested in and it fits into your retirement strategy.”
If this analysis shows the old 401k plan to be wanting, the decision is plain. “Are there investments they want in their retirement account that aren’t available through your current employer’s platform?” says Gary Watts, Vice President at Alamo Capital in Walnut Creek, California. He concludes “If there are, then rolling into an IRA will probably be appropriate.”
Sometimes the best tip to just to ask the audience and see what everyone else is doing. “I’d say 95-98 out of 100 people are better rolling over funds to an IRA than leaving the funds in place because the benefits of rollover almost always exceed the benefits of leaving funds in place,” says Jason Lina, Lead Advisor at Resource Planning Group in Atlanta, Georgia. “So from this assessment, a good rule of thumb is to rollover to an IRA. But don’t rollover to an IRA because someone is trying to sell you something (annuity, investments, etc.) in an IRA. Rollover to an IRA because it’s cheaper, more convenient, and provides more options.”
This is the decision making heuristic invoked by a significant number of those involved in making such decisions. To them, there is common sense in its simplicity. Saul M. Simon of the Simon Financial Group in Edison , New Jersey says, “I suggest we roll the money into their IRA account and/or establish a new one choose investments that are appropriate to their needs , being conscious of fees and their specific risk tolerance.”
Despite the appearance of a simple decision, bear in mind the need for proper due diligence. “We typically recommend our clients review all options available to them,” says Polson. “Often, however, the ability to rollover a 401k to an outside custodian/IRA is the right choice for the client. Many 401k sponsors have limited investment options to the participant. Our clients can choose from mutual funds, ETFs, stocks, etc. inside of a fee based account. They know the fees they are paying and can choose from all investment options instead of 15-20 funds selected by the plan.”
The bottom-line is that there is no cookie cutter solution that satisfies all. Jerry Linebaugh, owner of JLine Financial in Denham Springs, Louisiana, says, “Let’s look at the whole picture – age, employment, lifestyle needs, investable assets, emergency assets, plan and admin costs where the money is now vs where it could go, are you employed, unemployed or underemployed including spouse if married – before we make any decisions. There is no one size fits all answer but the answer is not hard to see when everything is on the table.”
On the other hand, let’s be frank, there’s no need to exhibit symptoms of a paralysis of analysis. In many cases, the evidence for action is fairly cut and dried. “Every situation is unique and personal, so it is all relative to their personal goals and objectives,” says Ben Offit, Financial Planner, Clear Path Advisory, Baltimore, Maryland. “However, in most cases I have found that it makes most sense to roll it over into an IRA for better investment management, diversification, and the opportunity for better advice by weaving it into your personal financial plan with an Adviser looking at the whole picture.”
Should you stay or should you go? In listening to veteran retirement advisers, it’s pretty clear that this is one answer more than just your hairdresser knows for sure.
Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s every 401k plan sponsor and service provider wants and needs to know.
Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His new book Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort is available at your favorite bookstore.