IRA MOVES - ARE THEY RIGHT FOR YOU?
Thursday, June 25, 2009 at 3:39PM By Janet Paskin | SmartMoney
According to most brokers and fund companies, the best move for anyone switching jobs or retiring is to transfer their 401(k) money into a rollover IRA. How do we know? Just ask them.
There's an expected $2.3 trillion in potential rollover money up for grabs in the next five years, and these companies—which make their money off the assets they manage—all want a piece of that. Check virtually any of their Web sites and you'll find helpful calculators or educational materials instructing investors as to why a rollover is their best option.
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Wallet: In Defense of My 'Clueless' Retirement Moves Guide: How to Make the Most of Your 401(k) Plan Guide: How to Select and Shop for an Annuity Trouble is, that's not always the case. Sure, taxes and penalties make cashing out a 401(k) an unappealing option. But some companies seem to posit that rolling your balance into an IRA is always the best choice. In fact, they rarely even mention the possibility of keeping your money in your old 401(k). Fidelity's "rollover evaluator" tool, for example, asks four questions, then offers a recommendation—and regardless of the information an investor gives, the answer is always the same: "Roll your 401(k) into a Rollover IRA." (The tool has since been taken off the site "for maintenance," the company says.) Schwab's pros-and-cons grid suggests that there's little difference between rolling over your balance and leaving it in your employer's plan; T. Rowe Price's Web site highlights the comparison between an IRA and a cash distribution, with little mention of other options.
That's just plain bad advice, says Alison Borland, a consultant in the defined contribution practice at management-consulting firm Hewitt Associates. Investors in a 401(k) plan often pay much lower fees than retail investors—sometimes half as much. That may be just 45 cents on every $100 invested, but over time those pennies add up. In fact, a 35-year-old with about $100,000 could, by the time she's 70, have paid an additional $116,250 in fees by switching to a rollover IRA, Borland says. But no one tells employees that, she adds: "There's no nice chart that pops up and says, 'By the way, you're going to pay higher fees and earn less in investment returns—are you okay with that?'"
For their part, fund companies say their materials aren't intended to be comprehensive, and a Fidelity spokesperson says its tool isn't supposed to be an investment recommendation. Indeed, there are compelling reasons to roll over—if, say, you'll have better investment or estate-planning options with an IRA, says Patti Brennan, a financial planner in West Chester, Pa. But to figure out what's in your best interest, experts say, you may need a better friend than your fund company.
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Reader Comments (2)
That may be just 45 cents on every $100 invested, but over time those pennies add up. In fact, a 35-year-old with about $100,000 could, by the time she's 70, have paid an additional $116,250 in fees by switching to a rollover IRA, Borland says.
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