What could I gain from rolling over a 401(k) into an IRA while already in retirement?
I am retired from a large corporation after 30+ years. I have a 401(k) plus a rollover IRA from a pension buyout by my former employer. Both accounts are with Fidelity because this was the investment company my employer utilized. My current Fidelity advisor is pushing me to roll the 401(k), which is with them, to the IRA which is also with them. Is there a compelling reason I should do it?
Most 401(k) plans have limited choices primarily focusing on mutual funds versus if you were to rollover your 401(k) to a IRA rollover. Another factor is the 401(k) administrative fees you may be paying for the plan and also the management fees. There are better investment options in an IRA that could potentially give you better diversification. Consolidating may have the convenience of reviewing your retirement plan with one statement, but then you would have your entire retirement account under one firm, although it sounds like this is already the case. It may be prudent to meet with a couple of respectable Investment Advisors to analyze where you are and where you want to be.
Another factor you may want to consider and discuss with your Financial Advisor and CPA is if and when a Roth conversion may be appropriate for your retirement plans. Once you reach the age of 70.5, you will be required to take required minimum distributions each year.
There are also considerations depending on the age you have retired. If you have retired in a calendar year in which you turn the age of 55 or older, then distributions from your 401(k) with that employer will not be subject to the additional 10% tax that normally comes with retirement account distributions before age 59.5.
Another factor would be if your 401(k) includes employer stock. There are net unrealized appreciation rules you may be able to take advantage of if so.
In summary, if you rolled over your 401(k), you could gain access to a broader range of investment choices, giving you better diversification of choices your 401(k) would not allow that could protect you from volatility in the markets. Also, you may be able to reduce your fees.
Thank you for submitting your question. It is very typical for the advisor that is associated with an employer retirement plan to "encourage" employee participants to roll the funds over into a IRA that is with the same institutional investment custodian, in your case Fidelity Investments. First, there is nothing wrong with Fidelity. In fact, a number of independent Registered Investment Advisors (myself included) use Fidelity Institutional as the investment custodian for our clients IRA accounts. Therefore, from the outset, I cannot say that rolling the funds over to Fidelity is the wrong thing to do. Furthermore, if I am going to be objective, then I would also say that there is no guarantee that rolling the funds over to Fidelity Investments would be the right thing for you to do either.
My suggestion is that you seek advice by meeting or speaking with at least two additional independent financial advisors and then figure out which firm is best suited to assist you with making this decision, including the subsequent retirement financial planning decisions that you will have to make.
I believe that your decision should be based more so on the qualitative and quantitative aspects of the firms that you interview. For example, how well do they understand your values, needs, and goals? Do they provide a complimentary financial plan, or would you have to pay to have a financial plan prepared for you? What is their approach to portfolio management? Are they a credentialed fiduciary? How much would they charge to manage your portfolio and will their compensation be based on commissions or a quarterly fee that is based on the value of your portfolio?
Ultimately, you are in a position of strength because many financial advisors are seeking prospective clients such as yourself. I would only caution you to be quick to do more research, get a couple of additional opinions, and be slow to make a fast decision, especially if you are being "encouraged" by a financial advisor representative of your employer's 401(k) plan.
I wish you the best with making this important financial and retirement decision.
There are pros and cons to a 401(k) rollover. The reason why your contact at Fidelity is pushing this could be based on a few factors, some of which may be good or bad. Here is some insight:
- A 401(k) has a few attractive features, including commission-free trading and automatic rebalancing. Also included may be access to mutual funds that you may not have access to on your own (certain mutual funds have high minimum investment amounts, whereas a 401(k) can easily meet these minimums across all participants).
- The less attractive features of a 401(k) are the limited investment choices (you can only own what's available in the plan) and the administrative costs within the plan. Depending on the size of the balance in your account, the number of investment holdings you like to keep, and the frequency with which you like to trade, keeping the funds in the 401(k) and paying the administrative expenses may be a better deal than moving to an IRA and paying your own trading commissions.
- Your Fidelity advisor may be motivated to eventually provide investment advice on your assets in your 401(k) if you roll them to an IRA and collect the associated fees. They may also be motivated to help you explore investment options that your plan does not currently offer. Either way, it's hard to say exactly where they're coming from. What I do know is that they're not likely a fiduciary that is mandated to operate in your best interest at all times, so I think you're wise to seek a second opinion from Investopedia.
Performing the rollover may also allow you to be strategic about your withdrawal strategy, it would make the taking of your Required Minimum Distributions easier, and it would make a strategic Roth IRA conversion approach easier to manage. Of course, these strategies require a measured approach and expertise.
If you'd like a more detailed second opinion, feel free to shoot me a call or message.
Adam C. Harding, CFP
A 401(k) is an ERISA protected plan that has lots of benefits at your former employer. The Fidelity advisor should show you the pros and cons of the movement, as required by new regulations. You should consider the fees and expenses, investment options, and risks of having a 401(k) with an employer versus an IRA. If you are going to roll it over to a Fidelity IRA, at least find out what value you may receive. If you will be paying a fee, what services will you be receiving for that fee? It is okay to have expert advice on your account, more importantly, are you getting more? Can you get a comprehensive plan done covering longevity risk, heath care risk, estate planning, tax planning, etc? How do you want to take care of your family? Ask if the planner is an independent fiduciary, are they working in your best interest at all times and is it written somewhere? Don't be afraid to ask. Check with a CERTIFIED FINANCIAL PLANNER(TM) practitioner to get a complimentary consult with your situation. They are required by ethics to give you the best option for you. Hope this helps!
The answer may depend on the investment choices you have in your 401(k) versus what you could invest in in your IRA. Possibly, your 401(k) only offers high fee funds or investment strategies that do not conform to your financial goals. Additionally, managing your overall asset allocation may be easier if your assets are consolidated in one account. When you have to start taking required minimum distributions from your retirement accounts at age 70 ½, it could be administratively easier if all of your retirement assets are in one account.
You should consider how the advisor you are working with is paid. Does the advisor receive a commission for selling you specific products or is the advisor using an asset-based fee structure? Under either scenario, it is likely that the more dollars you place under the advisors control, the more dollars he or she will earn. This is simply another factor you should consider when making your decision. Your best bet is to ask the advisor why they are making the recommendation and then evaluate the response. Even if the advisor has the potential to earn more if you place additional assets under his or her control, it may end up benefiting you more in the long run to consolidate your accounts.