Should I rollover my employee retirement plan?
I was recently told by more than one financial advisor that I should rollover my employee retirement plan (now that I've left that company) into an Individual IRA. When I called that company to do just that, I was told by their advisor not to rollover. He explained that I began investing in 2007/08 when the market was low. If I were to rollover to an Individual IRA today, I would be buying in when market prices are high, thus buying fewer stocks/bonds (whatever pieces comprise the plan). He also said, since your plan has averaged a 5.1% gain this year, why would I want to lose that? Makes sense. Can someone speak to this logic for NOT rolling over?
The best answer is to get a qualified investment professional to guide you in this decision. The benefits of keeping it with your employer is the ERISA protection (against creditors), but if you are in a good financial position and that is not a concern, then rolling it over into a individual IRA will give you more investment choices. However, if you are uncomfortable with self-management, you must weigh that into the decision. Sitting down and talking with someone about your investment goals and the money's future purpose will only help you to come to a decision that is best for you.
I hope that helps and good luck!
Wow, this answer is obviously geared to steering you toward keeping your money in the employee retirement plan, which typically is not your best option. Here are some things to consider:
- The "you bought low, why would you want to buy high," argument has no merit. Let's say you have $100 in your account currently and you move that money to equivalent funds in your own IRA. Let's also assume that funds within your employee retirement plan and any new funds you buy track the performance of the market. In each case, if the market goes up 10%, you now have $110 in your account and if the market declines by 10%, you'd have $90. It makes no difference whether the money is in your employer plan or your own IRA.
- You will not lose any gains you have accumulated in your plan. Let's again say you started this year with $100 in your account. It has now gone up 5.1%, which makes your current balance $105.10. When you transfer it, you do not lose your gain for the year - the whole $105.10 will transfer to your new IRA.
- Moving the money to your own IRA gives you the opportunity to invest in a wider variety of funds, often at a much lower cost than employee retirement plans. Fees are often high in employer sponsored plans. And while a small difference in fees might not seem like a big deal, it can result in many thousands of dollars in unnecessary costs that leave less money behind in your account to provide for your retirement. Check out the link that follows for an article I wrote that illustrates the impact of these fee differences.
- You can work with a financial advisor to help you invest in a well-diversified portfolio of Exchange Traded Funds with an average expense ratio of 0.25% or less, which is almost invariably lower than what you're being charged within your employer plan.
I hope you found this answer helpful and I wish you the best of luck with this important investment decision!
With Kind Regards,
The logic for keeping your assets in the plan makes little sense. Since 2007/8, the overall level of stock prices has risen so both your assets and the market are higher. It's not as if the plan assets have not risen while the market has. What's more, I don't see how you would be losing the 5.1% gain.
When you roll over to an IRA in a brokerage account, you would get a far broader selection of investment vehicles than are available in most employee retirement plans. That would be a better choice than simply rolling into only one fund, in which case, there would be no choice other than whatever the holdings of that fund would be.
There are other important issues. Back in 2007/8, the bond market was still rising while interest rates were going down. That phase is over. Interest rates have begun to rise and will continue to do so for the next couple of years. When rates rise, the value of fixed-income investments (bonds) goes down.
Furthermore, with most plans, your ability to reposition your assets may be limited to specified intervals. With a rollover IRA, you would have no such limits.
So the bottom line is that what these "advisors" have told you makes no sense.
In most rollover events, the assets within the existing retirement plan will transfer to the new Rollover IRA account. In other words, you should not have to liquidate the assets prior to transferring, so long as the assets are commonly held securities. The main difference with an IRA Rollover account is that you will most likely have more investment choices as you will not be limited to the retirement plan's fund choices. Often, the funds available in retirement plans can be expensive and perform poorly. If you decided to liquidate the assets within your account, you would not erase any gains from previous performance. One reason to not rollover the retirement plan is because it might be more of a hassle than it is worth, especially if the account value is small. It would be a good idea to find out what the total cost of management is (including management fees, admin fees, and the funds' expense ratios) at the current plan. Also, there may be some fees associated with closing the account and the transfer process. However, some brokerage firms will reimburse you for these fees if the account value is large enough. Take a hard look the total cost of management and the availability of choices within the plan and determine if you can purchase more investment options at a lower cost somewhere else. If you do the research, the decision will become obvious.
Yes, you should roll over your employer retirement plan into an IRA. There are a few exceptions depending on the circumstances, which I am not going to go into at this time.
The plan representative you spoke to likely told you to not roll your assets into an IRA because it is in the best interest of their firm. Typically, employer retirement plans such as 401(k) plans are administered by financial institutions that charge a percentage fee based on the asset size of the overall plan. Therefore, it is in the best interest of the representative and his/her firm for assets to remain in the plan. Therefore, keeping your assets with them would be in the representative’s best interests and not necessarily yours.
The representative’s point about the market being low in 2007/08 has no relevance in determining if your retirement assets are better held within a former employer’s retirement plan or held in an IRA.
If you roll your funds to an IRA, you are not losing the 5.1% gains that your assets have already experienced.
When you invest your money in an IRA, the account is in your possession. IRAs are not held to the same rules and restrictions that 401(k)s are. This means that you have fewer restrictions on the access to, and management, of your assets. An IRA typically allows for a much broader selection of investment choices, and freedom to choose what financial institution to custody the assets with. With an IRA, you have the option to choose a financial institution that has very low maintenance fees.