Many retiring workers are tempted to roll over their retirement savings into the unknown world of IRAs. But The Early Show financial adviser Ray Martin has some compelling reasons why doing so might not be the best idea.
Company Retirement Plan May Be the Best Place to Leave Your Money
Retirees and anyone who has saved a substantial amount in their company's retirement plan should strongly consider leaving their money in the company retirement plan before deciding to roll over to an IRA.
According to the Financial Research Corp. of Boston, an estimated $2.3 trillion will be rolled over from employer retirement plans into IRAs from 2003 to 2010. For a growing number of future retirees, retirement savings will be the cornerstone of their financial security, as pensions and Social Security make up a much smaller portion of the retirement income they will need to get by.
Your Company 401k Plan May Be the Best Plan
Leaving your retirement account in your employer's plan may seem contrary to conventional wisdom. The litany of advertisements from brokerage and mutual fund companies trumpet the advice that you should take your money with you when you leave your employer. As more workers with 401(k) accounts head into retirement, these advertisements are aimed at a growing market of individuals who will consider transferring or rolling over their retirement nest eggs to an IRA.
But retiring employees need to know that the 401(k) plan their employers offer provides several advantages — and their employer has a fiduciary obligation to serve the best interests of the plan and its participants, instead of serving the interests of a particular financial firm that is selling its own IRA products. Also, plans at larger employers have powerful bargaining leverage over investment managers and service providers and can use their size to negotiate institutional pricing for investment management at low rates. For example, it's not uncommon for a large plan to offer an S&P 500 index fund with total annual investment expenses of less than 0.08 percent, compared with the average expenses of a similar retail index mutual fund, which can carry fees of more than seven times as much, and also have possible front-end or back-end charges of more than three percent.
The reasons to transfer retirement assets to IRAs may include more investment choices, more flexible withdrawal features and access to investment management and advice. However, these advantages often don't compare with the advantages of leaving your retirement assets in the 401(k) plan. These include:
According to the Department of Labor Study of 401(k) Plan Fees and Expenses, investment management fees for investment funds offered in employer 401(k) plans range from .35 percent to 1.01 percent. That's a bargain when compared with the range of .59 percent to 1.95 percent for investment expenses in IRAs. All things being equal, over time, lower fees mean that your retirement savings will last longer in a lower cost 401(k) plan versus being invested in higher cost funds in an IRA.
Employer retirement plans do not charge low-balance fees, and annual account costs can range from $25 to $35 per year. Most IRAs require a minimum balance, and most charge account fees of $35 to $50 per year. Unlike retail brokerage IRAs, there are typically no transaction fees for buying and selling funds in most employers' 401(k) plans.
Many employer plans offer a stable value or guaranteed fund option, which provide an investment option with a high degree of safety and a reasonable current return. For example, a retirement plan provided by Boeing offers a stable value fund with a current yield of 4.64 percent. These types of funds are an increasingly larger part of a retiree's asset allocation as preservation and predictability of returns become more important. Stable value or guaranteed funds are NOT available as mutual funds in brokerage account IRAs, and it's hard to find a conservative investment with a yield even remotely close to this current rate in a retail IRA.
Other investment options uniquely being offered to 401(k) plan participants include the ability to use a part of a 401(k) account to buy an immediate annuity at low cost, or institutional prices. This lets a retiree who remains in a 401(k) plan buy a monthly income stream or convert part of a 401(k) plan balance into a monthly pension at a rate that pays more monthly income than what is available from products available from retail IRA offerings.
Many employers' plans let participants take withdrawals from their plan in periodic installments that are taken from specific investments. The combination of periodic installments taken from a stable value fund or a partial withdrawal to buy an immediate annuity can be a good option for retirees to draw-down their account over an extended period of time. But retirees need to check to see if their 401(k) plan allows a non-spouse beneficiary to remain in the plan — in some plans, after a retiree dies, the beneficiary who is not a spouse must receive the remaining plan account balance as a taxable distribution.
According to a survey by the Profit Sharing Council of America, more than 56 percent of employer retirement plans now hire investment advisers to provide investment advice to their plan's participants. When an employer hires an investment adviser to provide investment advisory services to participants in the company's retirement plan, the employer has a responsibility to perform an extensive background check and monitor the adviser. The investment adviser has a duty to provide investment advice that is always in the best interests of the plan's participants. Employers also have a duty to ensure that the fees charged by the investment adviser are reasonable.
Beware of Brokers:
When individuals place all of their retirement savings with a broker offering investment advice, it's buyer beware.
That is sure to be the advice given by the Proctor & Gamble retirees and employees who transferred their retirement plan accounts out of their employer's retirement plan and into IRAs managed by an A.G. Edwards broker. The broker's unauthorized and unsuitable stock trading resulted in catastrophic investment losses and insecurity for many retirees. That situation resulted in a settlement between A.G. Edwards and the State of Georgia, with A.G. Edwards agreeing to pay $27 million in restitution to 119 investors and P&G retirees.
But the reality is that what happened to P&G retirees can happen to anyone. As American workers age and more of them approach retirement, more will consider rolling over their retirement savings from the protected harbor of their employer's retirement plans into the unknown world of IRAs managed by brokers and investment advisers.
Many brokerage firms now label their brokers as "financial advisers" which sounds similar to the term "investment adviser," — often confusing the public. But to an individual seeking objective investment and financial advice, this is no small matter. Brokers have a duty to represent the interests of their firms and recommend and sell only investment products that their firm approves. If the investment products on the firm's "approved" list are not the most competitive available, or if lower-cost alternatives can be obtained elsewhere, the broker may not tell you. Brokers can also sell you stock from the firm's accounts, where their profits can be higher, and are only required to tell you after the fact. In effect, brokerage firms are packaging their products with advice, and the individual investor has the responsibility to find out about other alternative investments on their own.
Investment advisers, who register as such with the Securities and Exchange Commission, are subject to higher standards that are designed to protect investors. Investment advisers owe a fiduciary duty to the individuals they advise. These rules give more legal protection to investors. Advisers must provide additional disclosure and information about all fees they will charge.
For a list of the questions and information to request and review before handing over your retirement savings to a broker or advisor, see AARPs Financial Advisor Questionnaire