By Mark Miller
CHICAGO Jan 9 Regulators are sending a clear
warning: Beware the IRA rollover.
The Financial Industry Regulatory Authority (FINRA), which
self-polices the brokerage industry, issued a regulatory notice
late last month warning member firms against overselling clients
on shifting retirement dollars from 401(k)s to individual
retirement accounts when they retire or change jobs.
"Whether in written sales material or an oral marketing
campaign, it would be false and misleading to imply that a
retiree's only choice, or only sound choice, is to roll over her
plan assets to an IRA sponsored by the broker-dealer," the
Likewise, a report last year by the U.S. Government
Accountability Office found that plan providers often sell IRA
rollovers to workers without laying out the alternatives.
The warnings come as the U.S. Department of Labor gears up
to propose broad new rules later this year that would require
brokers to act as fiduciaries, including when they advise
clients on rollovers.
The financial services companies that administer 401(k)s
have a huge economic incentive to encourage rollovers, since
they generate transaction fees on trades and ongoing account
fees. And it's big business. Households transferred $288 billion
from workplace plans to IRAs in 2010, according to the most
recent data from the Investment Company Institute (ICI).
That figure dwarfed the $12.8 billion in direct
contributions that year - and the rollover numbers are expected
to swell as boomer retirements accelerate. Last year, 49 percent
of all IRAs contained rollover assets, ICI reports.
Rolling over your account to a new employer's plan or to an
IRA can make sense. It's certainly a better option than cashing
out, since that move sets back your retirement saving and
subjects withdrawals to ordinary income taxes. Plus, if you
haven't reached age 59 1/2, you'll pay a 10 percent penalty. But
in some situations, you may be better off staying put.
If you're evaluating a rollover decision, here are critical
questions to weigh.
- Will an IRA cost you more? Fees are one of the most
important determinants of long-term portfolio performance, so
it's important to compare expenses in the 401(k) you'd be
leaving behind with those in the IRA. New 401(k) fee disclosure
forms introduced last year make it easier to identify the costs
levied on each mutual fund in your plan, expressed as an expense
ratio. Sometimes, plans charge additional administrative fees;
those must be disclosed in your plan's Summary Plan Description,
which must be furnished to you on request by the plan sponsor.
If you're in a large 401(k) plan, chances are good that
costs are reasonable. Brightscope, which tracks 401(k) plan
performance, reports that fees levied in large 401(k) plans have
been falling for several years; in 2012, the average total cost
in plans with $1 billion or more was just 0.34 percent. (The
measure includes all of a plan's investment and administrative
costs.) And a recent Brightscope ranking of the 30 best 401(k)s
found total plan costs averaging just 0.28 percent.
But the story can be far different in small 401(k) plans.
Total costs in plans with $25 million or less in assets averaged
1.29 percent in 2011, according to the most recently available
It's not difficult to keep costs down in an IRA, especially
if you use low-cost passive index mutual funds or
exchange-traded funds. For instance, the Vanguard 500 Index
, which tracks the Standard & Poor's 500-stock index,
has an expense ratio of just 0.17 percent. But many actively
managed mutual funds have ratios well north of 1 percent.
"It's easy to look up a fund's ticker symbol and check the
expense ratio," says Christine Benz, director of personal
finance for Morningstar. "If it's higher than 1 percent for an
equity fund, that's a high cost."
- Do I need guidance? Your 401(k) plan sponsor has a
fiduciary responsibility to vet investment options - and the
plan can serve as a sort of guardrail against bad investments.
"If you don't know what you're doing and go out and buy a
risky social media fund in an IRA, you'd have been better off
staying in the 401(k)," says Benz. "The investment lineups
usually are plain vanilla, and investors can't do as much harm
And a growing number of plans offer participants low-cost -
or free - financial guidance from third-party services such as
Financial Engines or GuidedChoice. The advice can add to your
investment costs (typically no more than 50 basis points), but
it's coming from the best type of planner: an independent
adviser with the fiduciary responsibility to put client
- Simplify. If multiple 401(k) accounts are trailing you
around from previous jobs, it makes sense to consolidate -
either by rolling into your current 401(k), or to an IRA, if
your current employer's plan isn't up to snuff. That makes it
easier to manage asset allocation whenever you retire or
required minimum distributions if you've reached age 70.5.
- Do I need more flexibility? If you're a self-directed
investor with a wide-ranging appetite, an IRA offers a nearly
limitless menu of choices. It's also the place to do Roth IRA
conversions, although a growing number of 401(k) plans are
offering in-plan conversion options.
So - stick or switch? Unfortunately, there's no
one-size-fits-all answer. But the rising regulatory heat should
encourage more retirement savers to take a careful look at the
question, rather than fall for sales pitches.
"I give FINRA credit for looking at the issue, because some
advisers do have incentives to get clients to make decisions
that aren't in their best interest," says Benz. "But I'd hate to
see people get the idea that an IRA isn't a good idea, because
it often is the best route."