A few days ago I answered a readers question about post retirement 401(k) account withdrawals. A second part of his question asked about where to invest the account.
When most folks retire, they are advised to rollover their 401(k) account to a rollover IRA.
The tsunami of advertisements from brokerage and mutual fund companies shout that you should take your money with you when you leave your employer. With more workers with 401k plan accounts heading into retirement, these advertisements target a growing market of individuals who will consider transferring their retirement nest egg to a rollover IRA.
But retiring employees need to know that the 401k plan provided by their employer provides several advantages. This is largely because their employer has a fiduciary obligation to serve the best interests of the plan and its participants, instead of serving the interests of a particular financial firm that is selling its own IRA products. Also, larger employer plans have powerful bargaining leverage over investment managers and service providers, and use their size to negotiate institutional pricing for investment management at low rates. For example, it's not uncommon for a large plan to offer an S&P 500 index fund with total annual investment expenses of less than 0.05 percent, as compared to the average expenses of a similar retail index mutual fund which can carry fees of over seven times more, and also have possible front-end or back-end charges of over three percent.
The reasons to transfer retirement assets to IRAs may include more investment choice, more flexible withdrawal features and access to investment management and advice. But often these advantages do not outweigh the advantages of leaving your 401k plan, such as:
Lower Investment Expenses:
According to the Department of Labor Study of 401(k) Plan Fees and Expenses, investment management fees for investment funds offered in employer 401(k) plans range from .35 percent to 1.01 percent, which is a bargain when compared to the range of .59 percent to 1.95 percent for investment expenses in IRAs. All things being equal, over time, lower fees means that your retirement savings will last longer in a lower cost 401k plan versus being invested in higher cost funds in an IRA.
Low Account Fees:
Employer retirement plans do not charge low balance fees and annual account costs can range between $25 to $35 per year. Most IRAs require a minimum balance and most charge account fees that range from $35 to $50 per year. Unlike retail brokerage IRAs, typically there are no transaction fees for buying and selling funds in most employers' 401k retirement plans.
Unique Investment Options:
Many employer plans offer a stable value or guaranteed fund option, which provides an investment option with a high degree of safety and a reasonable current return. For example, in retirement plans provided by several large employers, a stable value fund with a current yield in excess of 3% is offered. These types of funds are an increasingly larger part of a retiree's asset allocation as preservation and predictability of returns become more important. Stable value or guaranteed funds are NOT available as mutual funds in brokerage account IRAs and it's hard to find a conservative investment with a yield even remotely close to this current rate in a retail IRA.
Other investment options uniquely being offered to 401k plan participants include the ability to use a part of a 401k plan account to buy a low cost institutionally priced immediate annuity. This allows a retiree who remains in their 401k plan to buy a monthly income stream, or convert part of their 401k plan balance into a monthly pension at a rate that pays more monthly income than what is available from products available from retail IRA offerings.
Flexible withdrawal features:
Many employers' plans allow participants to take withdrawals from their plan in periodic installments to be taken from specific investments. The combination of periodic installments taken from a stable value fund or a partial withdrawal to buy an immediate annuity can be a good option for retirees to draw-down their account over an extended period of time. But retirees need to check to see if their 401k plan allows a non-spouse beneficiary to remain in the plan - in some plans, after a retiree dies, the beneficiary who is not a spouse must receive the remaining plan account balance as a taxable distribution.
Investment Advisory Services
According to a survey by the Profit Sharing Council of America, over 56 percent of employer retirement plans now hire investment advisors to provide investment advice to their plans participants. When an employer hires an investment advisor to provide investment advisory services to participants in the company retirement plan, the employer has a responsibility to perform an extensive background check and monitor the investment advisor. The investment advisor to the plan has a duty to provide investment advice that is always in the best interests of the plans participants. Employers also have a duty to ensure that the fees charged by the investment advisor are reasonable.