Planning To Roll Over Your 401K To An IRA?

by Todd Smith on 2012-10-049

Years ago when I first worked the “front lines” talking to employees of some of the largest 401(k) plans, it seemed that many of the calls I received had something to do with employees who left or were leaving their employer. Often, people simply wanted to know “how to get their money” and we would discuss the various distribution options. Interestingly, some of the most heated conversations were automatic cash-outs. A little known regulation (at least to those calling) allowed employers to automatically send checks (a taxable event) to former employees with low plan balances. The rationale of course was that it became administratively expensive to keep former employee accounts, especially small ones, on the books.

In the past, majority of employers were quite comfortable with their employees pursuing rollovers since it was somewhat of a pain to keep administering these accounts. Not to mention, there was a cost to maintaining these accounts. But it seems that there has been a change in this basic sentiment held by companies. Apparently, the consulting firm Casey Quirk & Associates LLC, has found that around 2/3 of very large retirement plans are preferring to keep employee accounts intact even for workers who have already left their companies.

We all know that when a worker quits their job, they can do a rollover at any time, into an IRA. But it appears that there is a trend right now that shows that companies are quite interested in holding on to these employment accounts. And, what was already a confusing process for many employees, has become even more so.

401K to rollover IRA

Employers Want To Keep Your 401Ks

Why would this change? Well according to Allianz SE’s Pacific Investment Management Co , there’s almost $400 billion of assets in 401(k)s and similar retirement plans that are eligible to be rolled over into other vehicles this year. While it is obvious that every financial firm out there wants a piece of that action, for the first time, employers are more eager to hold on to these assets. For instance, certain companies and plan administrators are hoping to hang on to employee accounts by offering cheaper investment options, one-on-one investment advice, retirement planning and other retirement products like annuities. While others are instead making it harder for employees to perform rollovers, and are doing what they can to discourage the transfer process.

So why would employers want to hold on to your money? The number reason? Volume. With more plan assets, the company can negotiate better fees with mutual funds and brokerages. Also, more assets can give a company more clout: they can get access to other investment products that are not normally provided to general plans. Some of these interesting products include cheaper vehicles such as target date funds or other collective funds. With the expected surge in retirements from the well-known baby boomer generation, employers seem more eager than ever to hold onto these assets.

And, of course, large IRA players like Vanguard, Schwab, Fidelity, Scottrade, E*Trade etc. are fighting back by offering more services and tools such as blogs, online calculators, forums and maybe even additional resources and content in order to stand out to customers. Some companies even go so far as to give away cash for new rollover or retirement accounts. As examples, you can check out some brokers with special offers and promotions such as TD Ameritrade and E*Trade, that may dangle an extra $500 or free trades for each new sign up.

They All Want Your Retirement Accounts & Business!

So what does this all mean to you, the investor? Well personally, I think that investors are getting more options on both side of the fence –- from their former employer (who, frankly in the past was more a hindrance) and from financial firms. Asset-hungry firms are more than willing to offer enhanced services, flexibility, and in some instances cash for your business. On the downside, however, the process and options are more confusing than ever. When deciding what to do with an old 401(k), you must consider quite a few factors, from investment options and fees to taxes. While the 401(k) plan may offer investment choices not otherwise available to individual investors, it may also offer a more limited menu overall. And, a 401(k) plan’s fees can also be difficult to decipher. If you’re wondering what to do, here are some considerations to make to help you decide:

Should you stay with your plan or rollover to an IRA?

Rollover If
Stay If
Advice You need and want more ongoing investment management. You are comfortable with little to no true advice.
Investments You want more options. You are attached to certain plan investments.
Costs You are paying retail fees. Your plan offers lower-cost investments than you can find on your own.
Taxes You’d like to convert to a Roth. No desire to convert to a Roth.
Access You can wait until 59 ½. You may need income before 59 ½.
Simplicity You value consolidation. You are comfortable with managing several accounts.

The best way to figure out which direction to take is to understand what is most important to you and your life goals. As with anything, tune out the noise and realize what the motive may be. No longer is your employer or former employer willing to let your assets go so willingly even if it is in your best interest. They too may have their interests at heart rather than yours. On the other side, investment firms are asset-hungry, so be wary of those ploys they have that are designed to get you in the door. Take a hard look at what they have to offer before transferring your brokerage accounts or switching brokers.

Created August 30, 2010. Updated October 4, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.

{ 9 comments… read them below or add one }

mike@micromillion August 30, 2010 at 5:15 pm

I have a bunch of 401ks from former employers plus a cash balance pension account. MY strategy has been to just keep them as they are, since in each case I can own lower cost index funds. I keep some of it in “cash” (stable value funds), though, I’ve found that expenses vary greatly on these. I keep cash in the lowest cost plan.

Other than that everything else is in index funds.

Melissa @ PureFi August 31, 2010 at 9:23 am

You bring up various good points to consider, but it’s challenging to find compelling reasons to stay with a 401(k) plan at a former employer.

Why would I let my former employer make choices for me? I would prefer to control both my fees and investment options myself.

The expenses also point to moving 401(k) money to an IRA Rollover:
1) you pay administrative fees in 401(k)s which are not common in individual IRA accounts
2) it costs very little for an individual to buy index mutual funds, ETFs, or target date mutual funds

craig August 31, 2010 at 10:50 am

Thanks, this is something I would like to learn how to do. Do you need a certain amount of money?

Silicon Valley Blogger August 31, 2010 at 1:53 pm

Are you asking about a rollover? I just call the institution or broker I want to transfer my 401k to and they provide the instructions. The only requirement is to have a 401k.

My issue with consolidation is that I’m bad about dealing with the process. It’s hard for me to get through the inertia of changing how my accounts are set up. I find it to be a big pain. So I end up collecting 401Ks with small amounts in each account. Not very organized and not very optimal, I will agree. I just have to get my act together! September 2, 2010 at 8:01 am

There is also a lot of benefit for rolling to an IRA of some sort from your old 401K for estate planning reasons. Your heirs will have an easier time of disbursement of the assets.

While we are talking rollover, remember to consider a ROTH.

Ann August 10, 2011 at 8:19 am

I’m interested in the pros and cons of rolling a 401K into a traditional IRA at the age of 69 if I do not need the money, but am more interested in which of these two plans would be more beneficial to my beneficiaries when I die.

401k loan guy August 26, 2011 at 4:40 pm

I am more of a fan of rolling it over.

Michael Crosby October 4, 2012 at 10:23 pm

When my wife retires, our idea is to rollover her defined contributions into a ROTH. It will be a big hit tax wise, but I don’t care. (Even if financial advisers seem against it for older people.)

Here’s why: When I know my money can grow tax free, I’m really more serious about making the best investments that I think I can.

2. I love that the money can grow and all money will be tax free.

3. When I buy a stock with my own money now, I’m leery about capital gains taxes and I keep the stock for a year, even if I may want to trade it. But with a ROTH, to my understanding I don’t have to worry about capital gains. Am I right on that?

occupational therapist October 5, 2012 at 5:36 am

The best advice on moving a 401k upon lay off or retirement, is to just let it sit for six months with your old employer. Craft a strategy of what you want to do with a competent financial advisor. Make sure you understand all the taxes and penalties associated with each option. And then move the money if it is in your best interest to do so.

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