When an IRA beats a 401(k) for your retirement savings

If asset growth rates were a race, individual retirement accounts could soon be lapping 401(k) accounts. Assets added to IRAs are set to grow to nearly twice the amount of assets in 401(k) retirement plans over the next four years, according to a report released by Cerulli Associates, a retirement industry consulting and research firm.

What's behind the faster growth of IRA assets? Rollovers from 401(k) plans. 

Workers and retirees are opting to transfer their assets out of a 401(k) or other employer-sponsored retirement plan and into an IRA because the former lack flexible withdrawal options such as ad-hoc withdrawals.

Individuals request to take distributions from retirement accounts for variety of reasons. And those reaching 70 1/2 are required to take minimum distributions beginning at that age and annually thereafter. So, when separated or retired plan participants need to withdraw from a 401(k) plan that doesn't offer flexible options, they'll typically transfer their plan balance into an IRA, which allows withdrawals to be made at any time and in any amount.

But before you decide to roll over a substantial amount of your workplace retirement plan to an IRA, first take some time to carefully review the features and benefits of the employer's plan.

Leaving your money in your employer's plan is still an option, even though it may seem counterintuitive. Almost all brokerage and financial firms advise taking your money with you by rolling it over to an IRA. This advice targets a growing number of workers nearing retirement.

And while that advice may be good in your situation, before you proceed, you still need to review the differences between a 401(k) and an IRA offered by a broker or investment adviser.

Among an IRA's advantages are more investment choices, more flexible withdrawal features and access to investment management and advice. But sometimes these points may not be better than leaving your assets in the 401(k).

Large employer plans have powerful bargaining leverage over investment managers and service providers, so they can use their size to negotiate institutional, lowest-cost-available prices. 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, compared to a similar retail index mutual fund offered in IRAs that can carry fees of up to 10 times more.

Many employer plans offer "stable value" or "guaranteed" funds, which provide a high degree of safety and a reasonable current return. For example, a stable value fund with a current yield of over 3 percent is a typical investment option. These types of funds aren't available as mutual funds in brokerage-account IRAs, and it's hard to find a conservative investment with a yield even remotely close 3 percent in a retail IRA.

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

But in many cases, rolling over your 401(k) plan to an IRA and having it managed by a professional you select is a good idea. In fact, that might be the better option if your adviser offers more personalized service and easy access to the money in your IRA.

Many good advisers can help in evaluating your decision to rollover your 401(k) to an IRA. This should include a side-by-side analysis of the features, benefits, investment options and fees for both.

In the Cerulli Associates report, IRA assets, which were estimated at about $9.2 trillion at the end of 2017, are set to grow to over $12.6 trillion by the end of 2022. Assets in employer-sponsored 401(k)-type plans are expected to grow to only $6.6 trillion in 2022, from $5.3 trillion at the end of 2017.  

About 96 percent of the $2 trillion contributed to IRAs last year was due to rollovers from 401(k) type retirement plans. Contributions to IRAs -- mainly from rollovers -- have exceeded distributions. But that's not the case for 401(k) plans. In the last few years, distributions have exceeded contributions, and the only reason 401(k) assets have grown is due to positive stock market performance.

  • 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.