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?
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.
This is a question that many people have. And in many cases, the answer can be straight forward once we weigh the pros and the cons. So, the major advantages into investing in a 401(k) plan are as follows: First, the biggest advantage of course comes from the “free money” so to speak that one receives when their employer matches a portion of the employee’s contribution. Second, the amount you can contribute to your plan ($18K if you're less than 50 years of age, plus an additional $6K if over the age of 50). Third, the fact that most 401(k) plans have low fees. Fourth, most 401(k) programs have low interest loan options you can take out against your 401(k) plan (certain requirements apply). And rounding out my top 5 advantages of having a 401(k) plan is if you work for a private company, the only way you may be able to purchase company stock is through a company retirement plan. So, when you are still employed by the company, the only real disadvantage to the 401(k) plan may be the limitations on investment options.
So, what happens when you separate from your employer? The only tangible benefit left out of the top five are the low fees. For this reason, most people choose to move their 401(k) into an IRA. The trade off is possibly paying slightly higher fees if the opportunity for professional advice and more investment options can help a client improve their chances of reaching their financial goals. So, to answer your question, if you have an advisor, and you trust him/her, the only issue that needs to be addressed from my perspective is the fee issue. It would be natural for your advisor to request moving your 401(k) into an IRA so he/she can have control on your entire investment strategy; which should be focused on your financial goals. And if you feel as though he/she is committed to that strategy, and the fees assessed are “fair”, my advice is to continue to trust your advisor and honor his/her request.
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
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
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.