In our Ask an Expert Series, the Financial Advisors of Propel address common misconceptions, mistakes, and missing information we see in media stories.
As part of our continuing effort to dispel some myths or half-truths you might read on the internet, this blogpost directly responds to an article published by Forbes online titled “Rolling Over a 401(k) to an IRA Can Cost You Thousands of Dollars” by Bob Carlson and published on July 21, 2022. Read the article here: https://www.forbes.com/sites/bobcarlson/2022/07/21/rolling-over-a-401k-to-an-ira-can-cost-you-thousands-of-dollars/
In the article, the author focuses on the fees associated with mutual funds held in a 401(k) account. As we discuss further below, this fee is only one of many considerations when deciding whether to rollover a 401(k) into an IRA.
For background, mutual funds come in different share classes. One common type is called the “institutional” share class. This class generally is for large institutions who buy significant amounts of the fund. In return, the mutual fund company charges a lower fee on the fund. Another common type is called “retail” share class. In this class, generally marketed towards individual investors, a smaller investor gets access to the investment strategy but is charged a fee higher than the institutional share class. The fee difference typically is a fraction of a percent. While small, the fee difference can accumulate over time.
Advisor Danielle Woods responds to this article:
Of course, the title is nothing short of clickbait. Anything you do in finance can cost you thousands of dollars, including staying in a 401(k) when you have the option to roll out to an IRA.
If you have an employer 401(k) plan and leave that employer, you have the option of rolling out to your own individual retirement plan (IRA). A rollover is a nontaxable transfer of assets from one account to another. Why would you do that?
- Control over the investments: 401(k) plans often have very limited options. Rolling to an IRA would give you much broader access to investable assets. Ultimately your investment choices and allocation will be a greater predictor of your portfolio performance than a small percentage difference in mutual fund fees. An IRA rollover typically gives you: (1) A greater ability to adjust or broaden your asset allocation, (2) access to a larger universe of portfolio managers with proven records of exceptional performance, (3) transparent investments available in open markets, rather than opaque, proprietary investments in 401(k) funds, and (4) flexibility to choose investments that align with your social values.
- Fees: As the Forbes article correctly points out, the administrative and fund fees in 401(k) plans differ greatly. 401(k)s, by their very nature, are complex and expensive to administer. Every employer chooses how much of those fees to pass along to the employees and how much to pay themselves.
- Investment Advice: Some 401(k) plans have an advisor option, some do not. If you roll out to an IRA, you have the choice of managing your portfolio yourself or hiring a professional advisor like Propel to manage it for or with you.
- Withdrawal flexibility: While we rarely recommend taking money from your retirement to pay off debt or spend on personal expenses, sometimes you have no choice. Funds in a 401(k) are difficult to withdraw unless you are of retirement age or can take a loan against your account. Alternatively, you can take a distribution any time from an IRA as long as you are prepared to pay any income tax and penalties assessed by the IRS and/or state tax agencies.
- Account consolidation. If you’ve held many jobs, it’s easy to lose track of old 401(k) plans. Who remembers a login from a job 10 years ago? Rolling everything into an IRA eases the administration of your retirement accounts.
The Forbes article states that 401(k) plans provide their employees the benefit of institutional shares versus retail shares of mutual funds with the latter being more expensive on an annual basis. While that is true, hiring a professional financial advisor may also provide an investor with cheaper fees on institutional shares, such as those Propel purchases for our clients.
If there is an overarching idea that we do agree with in this article, it’s that all accounts and investors are different and require a detailed review of the pros and cons before making a decision.