What to consider before rolling over your 401(k)

Before you roll over a substantial amount from your company's 401(k) retirement plan to an IRA, you should should give it plenty of careful thought, even though leaving your money in your employer's plan may seem contrary to conventional wisdom.

After all, almost all brokerage and financial firms advise that you should take your money with you when you leave your employer and put it into an IRA. This advice targets a growing number of workers nearing retirement who face the decision about what to do with their nest egg.

But before you act on that advice, you need to review the benefits of your employer's plan. It's important to know that the sponsor of your employer's 401(k) plan is legally bound as a fiduciary to serve the best interests of the plan and its participants. Also, large-employer plans have powerful bargaining leverage over investment managers and service providers, and they use their size to negotiate institutional pricing for investment management at the lowest available costs.

For example, it's not uncommon for a large plan to offer an S&P 500 index fund with total annual expenses of less than 0.05 percent, compared to similar retail index fund that can carry fees of seven to 10 times higher. And when it comes to an IRA, the broker or advisor offering it may be primarily focused on serving the interests of a particular financial firm and selling its own IRA products.

On the other hand, there are good reasons to transfer retirement assets to an IRA. They include more investment choices, more flexible withdrawal features and access to investment management and advice. But sometimes these advantages may not compare well to what you get by leaving your retirement assets in the 401(k) plan.

Here are a few specific things to consider before rolling over your 401(k) into an IRA:

Investment expenses: Fees and expenses for investment funds offered in employer 401(k) plans typically range from 0.03 percent to 1 percent. This can be a bargain compared to typical expenses found in funds purchased by IRA investors, which range from 0.5 to 1.5 percent. On a $100,000 balance, that means an employer's plan expenses can be as low as $30 per year, versus $1,500 per year in a high-cost IRA. All other things being equal, lower fees mean your retirement savings will grow more and last longer.

Special investment options: Many employer plans offer a "stable value" or "guaranteed fund option," which provide investment options with a high degree of safety and a reasonable current return. For example, several large-employer plans offer a stable value fund with a current yield in excess of 2.5 percent. These types of funds are often 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 in brokerage account IRAs, and it's hard to find a conservative investment with a yield even remotely close to this in a retail IRA.

Other investment options uniquely offered to 401(k) plan participants include the ability to use a part of your account to buy an immediate annuity at low-cost, institutional prices. This allows a retiree who remains in the plan to buy a monthly income stream that pays more monthly income than what's available from retail IRA offerings.

Investment advice and management: Most employer plans now offer investment advisory services through vetted providers. They can offer advice on which investments to use, how much to save for retirement as well as provide ongoing account management to you. When an employer hires an investment advisor to provide these services, the employer has a responsibility to perform an extensive background check and monitor the advisor. And the advisor has a duty to provide advice that's always in the best interests of participants. Employers also have a duty to ensure that the advisor's fees are reasonable.

All that said, it doesn't always mean rolling over your 401(k) plan to an IRA and having it managed by an advisor you select is a bad idea. In fact, that might be the better option if your advisor offers more personalized advice and service that are part of an overall financial planning strategy.

Any advisor worth working with (and you can find many) will review the above considerations before recommending that you rollover your 401(k) to an IRA.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.