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?
Drum roll please! And the answer is... it depends!
If your 401(k) is from a large corporation, it may have low fees and really good investment options than if you had you been with a small company. The reason is that small business owners are more concerned with keeping the company going then to spend time on making the 401(k) great. Big companies have more resources and some 401(k) plans like at Apple are really good.
I do not know your age, what income you have, nor your expenses or your family situation, so giving investment advice specific to you cannot happen.
You say your Fidelity advisor is pushing you to roll over the 401(k). So, the all-important question is “will the advisor and Fidelity benefit from the rollover?” Are you paying Fidelity to manage your IRA? If the answer is yes, then when you roll the 401(k) into the IRA, the management fee will (in most cases) be higher. This could be a reason to not roll it over!
The next question would be to review the investment options in the 401(k) and compare them to what is in your IRA accounts. Some 401(k) plans have investment options outside of Fidelity. If you were to roll the 401(k) over to an IRA, the Fidelity advisor might suggest more Fidelity funds, which could be a conflict of interest since Fidelity would benefit from more Mutual Fund fees.
After understanding a clients situation, I often suggest that those retirees that have a 401(k) via Fidelity to roll it over to an IRA so that we can have improved investment options and with lower fees than what is in the 401(k).
My advice to you would be to ask more questions and to read the following articles.
9 Considerations Before Rolling Over Your 401(k)
Busting 5 Financial Myths
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.