Should I rollover my 401(k)?

This is a pretty common question workers consider when they are on the precipice of retirement. Does it make sense to keep your investments in a 401(k) or move them over (called a rollover) to a Rollover Individual Retirement Account (IRA)? Well, it depends on a few considerations:

• Do you like your 401(k) plan? Do they have decent investment options? Some plans offer a multitude of options while others have very limited choices. An IRA, on the other hand, offers access to a plethora of investment options.

• What are the fees? Often times 401(k) plans can be more expensive to manage than IRAs. They can average between 1-2% a year, and even go as high as 3%. This is because the 401(k) plan requires extra administration and there can be more layers of fees. It can be mind boggling trying to figure the fees associated with each 401k plan. Higher fees hurt the performance of your portfolio. And what can sound insignificant - .5% vs. 1%- in fees can be substantial over the long run. For example, let’s say you have $800,000 at retirement and paying .5% in management fees. That’s $4,000 a year vs. $8,000 year at 1%! But that’s just in one year. Draw that figure out over the life of your retirement and that’s thousands of dollars in fees you don’t necessarily have to pay.

  Looking at one of my client’s 401(k) plans, for example, I can see several layer of fees. Here is what her statement shows:

  • Gross Expense ratio. This is the annual operating fee of the mutual fund. Some funds are more expensive than others. (A blog post for another time!). Vanguard offerings can be as low as .07% while more expensive funds in her plan are as high as .85%. If a plan doesn’t offer low cost funds like Vanguard, that increases your fees.

  • Net Asset Fee. This is an administration fee. The administration fee for her plan is .52% annually.

  • Other Fees. I find a .05% fee called “asset based plan administration fee”. So another administrative fee.

  • Advisor/Service provider expenses. These are to cover legal, accounting, and recordkeeping fees. In her case this is a quarterly fee amounting to almost .50% annually.

This plan is layered in fees, perhaps costing 1.5-2% a year depending on the investment options she chooses.  For more information on 401k fees, checkout this article.

•  How old are you? If you are retiring early at age 55, you may want to keep some funds in your 401(k) plan to cover distributions until you are 59 ½. Under most circumstances, you will need to be 59 ½ to take a penalty free distribution from your IRA (there are exceptions). If your plan allows it, you may be able to do a partial rollover where you keep enough funds in the 401(k) to cover early retirement while the rest move over to the Rollover IRA.

• Do you mind navigating to multiple accounts? A benefit of rolling over your 401(k), especially if you already have your own IRAs, is to have all accounts in one place for easier management. And there is generally less bureaucracy managing your IRA rather than dealing with the 401(k) administrator.

• Are you concerned your assets will be subject to creditors or lawsuits? Generally, most 401(k) plans are better protected from outside creditors than IRAs when they qualify under the Employee Retirement Income Security Act (ERISA). See this article for more information. There are laws that also protect IRAs and they vary state by state.

Not all 401k plans are equal. I have seen plans from large employers that can be quite excellent while other plans offer the bare minimum layered in fees. Ultimately, you will have the most control in an IRA.

If you need in-depth retirement planning, book an appointment today and we can see if what Birch Point offers meets your needs.