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Best Places for Your 401(k) Rollover

Banks are increasingly the destination of choice for Americans rolling over their 401(k) into an IRA. That qualifies as "uh-oh" worthy in my book.

According to a new survey of affluent investors by BAI and the Financial Research Corporation (investable assets of at least $50,000 is all it takes to qualify) banks are grabbing serious market share from brokerages and fund companies. Check out this telling chart that shows banks' share of rollovers has nearly doubled since 2007.

Source: BAI Research, FRC.

No doubt, the financial crisis has played a role in the shift, as more investors flocked to the supposed safety of banks. I say supposed, because holding your retirement assets in the bank doesn't really guarantee it is safe.
  • There's no FDIC insurance if the money is actually invested, not saved. Hopefully this is clear, but just in case: If you rollover the money into a bona fide bank account, such as CD, or money market deposit account (MMDAs), you are in fact protected by FDIC insurance, up to certain limits. But if you roll over the 401(k) to a bank account and then invest the money in a mutual fund, ETF or the direct purchase of stocks and bonds, that money is not covered by FDIC insurance. Classic bank savings accounts are covered by FDIC insurance. Investments are not.
  • CDs and MMDAs are in fact dangerous for your retirement security once you factor in inflation. Over a 20-year period, a 4 percent annualized inflation rate-the norm for the past 50 years-will erode the purchasing power of your money by about 50 percent. With that perspective, the strategy of keeping your retirement money in "safe" bank accounts doesn't exactly seem so safe. The bottom line is that even if you are close to retirement, or retired, a portion of your assets likely needs to still be invested in equities. Not all, and certainly not even the majority, but some. A 65-year old today has an average life expectancy of close to 20 years. And if you're in the half of today's 65-year-olds that makes it those 20-odd years , you'll then have another five to 10 years of expected life expectancy. Let me do the math: If you're 65 today it's not far-fetched that you will still be around at 90.
The Fee Factor
Okay, so where's the best place for your 401(k) rollover? Fees should be a major factor in your decision. Let's assume that any bank, discount brokerage, full-service brokerage or mutual fund company has a complete lineup of investment options you could use to build a diversified age-appropriate retirement portfolio. So how do you differentiate among those choices? Cost. The less you pay in investment costs, the more money that stays invested for your retirement security. If you can find a bank that offers investments with lower annual expenses than the funds and ETFs offered at Fidelity, Vanguard, or Schwab, then by all means give that bank your rollover business. But I think in most instances you will find that in terms of low-cost investing, those three are hard to beat.