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American workers often change jobs and have to decide what to do with their 401 (k) balances at their former employers. I've worked as a 401 (k) planning consultant for over 30 years, with companies like Apple and AT & amp; TI am therefore a supporter of 401 (k) plan members and have often faced this situation.
For the vast majority of 401 (k) plan members, in my experience, it makes no sense to defer their 401 (k) balances from a former employer to an individual retirement account, or IRA. Here are the reasons why.
1. Stable Value Funds are not available
Most 401 (k) plans offer stable value investment options or guaranteed funds as a safe choice, rather than money market funds. Returns on money market funds have been well below stable value or guaranteed interest rate for many years. It is likely that the yield differential will continue.
For conservative investors or 401 (k) group members close to retirement, access to stable / guaranteed value funds during this low rate period has been an absolute boon. It is difficult, and most of the time, impossible to find investment options in guaranteed or stable value funds available to IRA account holders.
Therefore, the risk-free investment option for an investor in an IRA rolling account will likely be a low-interest money market fund or cash – not the best options.
2. IRA Advisors Can not Be Trustees
IRA account investors should consider whether the investment options recommended by their advisor are more beneficial to the advisor than to the investor. It is very possible that their advisor does not act as fiduciary when making investment recommendations.
This means that the advisor is not required to consider the best interest of the client. As a result, any investment recommendation made may be beneficial to the advisor and the company, but not to the investor.
In a 401 (k) plan, not only is the employer required to be a trustee but the investment adviser associated with the plan is likely to to be only one as well as.
What approach do you think is generating better investment opportunities?
3. Performance gaps are important
According to the Center for Retirement Research, the average return of an IRA for the 12-year study period was 2.2%. The average return in a 401 (k) plan account for the same period was 3.1%.
Although none of these returns will allow anyone to retire so soon, there is a huge difference between the two. The return of participants to the 401 (k) plan was almost 41% higher.
The results of this study prompted President Barack Obama to ask the Ministry of Labor to adopt fiduciary rules governing ARI rollovers. Unfortunately, these regulations were subsequently canceled.
4. IRA turnover = higher fees
The main reason given in the Center for Retirement Research study for explaining the difference in performance between 401 (k) plans and IRAs was so important that investors of this type paid much higher fees.
5. Options of Average Pay Limits of 401 (k)
the average 401 (k) In 2017, the average US worker's account balance was just over $ 100,000. Unfortunately, there are not many advisors willing to work with IRA postponed accounts of this size.
As a result, the average participant will pay excessive fees to the largest consulting companies & nbsp; or will work with discount brokerage firms or mutual fund companies where objective investment advice is not available.
6. Objective investment consulting options are few
An average 401 (k) plan member who considers a turnover has few options for objective investment advice. Advisors of major brokerage firms & nbsp; are in conflict because of their desire to generate transaction costs and recommend well-paying investments.
Mutual fund families who provide investment advice are not objective because they are primarily asset managers and therefore tend to over-recommend their funds. They are not eager to recommend investment options outside of their fund families that could be better solutions.
Very few advisors are willing to take care of small business without substantial costs. Balances under $ 1 million may be subject to annual fees of up to 2%.
However, most 401 (k) plan members can receive free objective investment advice from the advisor associated with their 401 (k) plan.
7. Balances reported from IRA are too small to meet minimums
Almost all of the least expensive mutual fund equity classes available to investors outside of pension plans have minimums that far exceed the average participant balance of $ 100,000. Many are $ 1 million or more. As a result, the average 401 (k) plan member who converts a balance into an IRA will often end up investing in one of the most expensive retail share classes.
Almost all 401 (k) schemes use low-cost, institutional or R6 institution classes. The cost difference is at least 50% to 1%.
8. Transaction costs are likely with IRAs
Many brokerage firms, banks, and insurance companies are interested in creating transactional revenue. As a result, not only do IRA account renewal account holders invest in higher cost funds, but they must also incur transaction fees on purchases and sales.
Keep in mind that 401 (k) plan members have access to free, objective investment advice and low-cost investment options. They can make purchases / sales and transfers without any transaction costs.
9. IRAs offer less creditor protection and prosecution
The balance of your 401 (k) account is secured from creditors by seizure if you declare bankruptcy. In addition, your 401 (k) balance can not be included in any lawsuit.
IRA account holders do not enjoy the same level of legal protection and are subject to state laws, which vary.
10. Early withdrawal penalties with IRA
Many 401 (k) plans allow participants to retire from age 55. Under the law, these early retirees can withdraw without penalty from their 401 (k) account.
IRA account holders who retire and take withdrawals before age 59 & frac12; are subject to a 10% federal penalty tax and, possibly, an early withdrawal tax.
11. Loans are not available
You can not borrow money from your IRA, but you are probably eligible for one of your 401 (k) plan. Although I am not in favor of 401 (k) loans, This is an important option to have in case of financial emergency and if you can not get a bank loan.
12. Going to your current employers 401 (k) is a much better option
It is almost always a good idea to transfer the balance of your former employer's 401 (k) account or IRA into the 401 (k) plan of your current employer, for all the reasons outlined above.
In addition, it is easier to manage your retirement savings if everything is in the same account. And you will receive more comprehensive investment advice.
As an advocate for 401 (k) plan members, I am concerned that very little information needed to make a good renewal decision is shared with participants in an understandable manner.
Most participants only receive information about transfers from an adviser who tries to get them to transfer their money and so are in conflict.
As a result, I think most investors make bad decisions when they decide to transfer their 401 (k) plan accounts to IRAs.
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American workers often change jobs and have to decide what to do with their 401 (k) balances at their former employers. I've worked as a 401 (k) planning consultant for over 30 years, with companies like Apple and AT & TI am therefore a supporter of 401 (k) plan members and have often faced this situation.
For the vast majority of 401 (k) plan members, in my experience, it makes no sense to defer their 401 (k) balances from a former employer to an individual retirement account, or IRA. Here are the reasons why.
1. Stable Value Funds are not available
Most 401 (k) plans offer stable value investment options or guaranteed funds as a safe choice, rather than money market funds. Returns on money market funds have been well below stable value or guaranteed interest rate for many years. It is likely that the yield differential will continue.
For conservative investors or 401 (k) group members close to retirement, access to stable / guaranteed value funds during this low rate period has been an absolute boon. It is difficult, and most of the time, impossible to find investment options in guaranteed or stable value funds available to IRA account holders.
Therefore, the risk-free investment option for an investor in an IRA rolling account will likely be a low-interest money market fund or cash – not the best options.
2. IRA Advisors Can not Be Trustees
IRA account investors should consider whether the investment options recommended by their advisor are more beneficial to the advisor than to the investor. It is very possible that their advisor does not act as fiduciary when making investment recommendations.
This means that the advisor is not required to consider the best interest of the client. As a result, any investment recommendation made may be beneficial to the advisor and the company, but not to the investor.
In a 401 (k) plan, not only is the employer required to be a trustee but the investment adviser associated with the plan is likely to to be only one as well as.
What approach do you think is generating better investment opportunities?
3. Performance gaps are important
According to the Center for Retirement Research, the average return of an IRA for the 12-year study period was 2.2%. The average return in a 401 (k) plan account for the same period was 3.1%.
Although none of these returns will allow anyone to retire so soon, there is a huge difference between the two. The return of participants to the 401 (k) plan was almost 41% higher.
The results of this study prompted President Barack Obama to ask the Ministry of Labor to adopt fiduciary rules governing ARI rollovers. Unfortunately, these regulations were subsequently canceled.
4. IRA turnover = higher fees
The main reason given in the Center for Retirement Research study for explaining the difference in performance between 401 (k) plans and IRAs was so important that investors of this type paid much higher fees.
5. Options of Average Pay Limits of 401 (k)
the average 401 (k) In 2017, the average US worker's account balance was just over $ 100,000. Unfortunately, there are not many advisors willing to work with IRA postponed accounts of this size.
As a result, the average participant will pay excessive fees to large consulting firms or work with discount brokerage firms or mutual fund companies where objective investment advice is not available.
6. Objective investment consulting options are few
An average 401 (k) plan member who considers a turnover has few options for objective investment advice. Advisors to large brokerage firms are in conflict because of their desire to generate transaction fees and recommend investments that pay them well.
Mutual fund families who provide investment advice are not objective because they are primarily asset managers and therefore tend to over-recommend their funds. They are not eager to recommend investment options outside of their fund families that could be better solutions.
Very few advisors are willing to take care of small business without substantial costs. Balances under $ 1 million may be subject to annual fees of up to 2%.
However, most 401 (k) plan members can receive free objective investment advice from the advisor associated with their 401 (k) plan.
7. Balances reported from IRA are too small to meet minimums
Almost all of the least expensive mutual fund equity classes available to investors outside of pension plans have minimums that far exceed the average participant balance of $ 100,000. Many are $ 1 million or more. As a result, the average 401 (k) plan member who converts a balance into an IRA will often end up investing in one of the most expensive retail share classes.
Almost all 401 (k) schemes use low-cost, institutional or R6 institution classes. The cost difference is at least 50% to 1%.
8. Transaction costs are likely with IRAs
Many brokerage firms, banks, and insurance companies are interested in creating transactional revenue. As a result, not only do IRA account renewal account holders invest in higher cost funds, but they must also incur transaction fees on purchases and sales.
Keep in mind that 401 (k) plan members have access to free, objective investment advice and low-cost investment options. They can make purchases / sales and transfers without any transaction costs.
9. IRAs offer less creditor protection and prosecution
The balance of your 401 (k) account is secured from creditors by seizure if you declare bankruptcy. In addition, your 401 (k) balance can not be included in any lawsuit.
IRA account holders do not enjoy the same level of legal protection and are subject to state laws, which vary.
10. Early withdrawal penalties with IRA
Many 401 (k) plans allow participants to retire from age 55. Under the law, these early retirees can withdraw without penalty from their 401 (k) account.
IRA account holders who retire and withdraw before the age of 59 years are subject to a federal 10% penalty tax and possibly a tax on early withdrawals.
11. Loans are not available
You can not borrow money from your IRA, but you are probably eligible for one of your 401 (k) plan. Although I am not in favor of 401 (k) loans, This is an important option to have in case of financial emergency and if you can not get a bank loan.
12. Going to your current employers 401 (k) is a much better option
It is almost always a good idea to transfer the balance of your former employer's 401 (k) account or IRA into the 401 (k) plan of your current employer for all the reasons outlined above.
In addition, it is easier to manage your retirement savings if everything is in the same account. And you will receive more comprehensive investment advice.
As an advocate for 401 (k) plan members, I am concerned that very little information needed to make a good renewal decision is shared with participants in an understandable manner.
Most participants only receive information about transfers from an adviser who tries to get them to transfer their money and so are in conflict.
As a result, I think most investors make bad decisions when they decide to transfer their 401 (k) plan accounts to IRAs.