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7 Reasons to Rollover 401k Accounts to an IRA

When I leave a job, I am a big fan of rolling over my 401k balance into my IRA account at Fidelity. It is usually one of the first things I do after changing jobs. Many prospective clients I meet have several legacy 401k accounts at various employers. I encourage them to consolidate their old 401k accounts into a single Rollover IRA account. Here list a list of reasons to Rollover 401k Assets into an IRA:

1. Consolidate assets to one financial provider – Moving all of your 401k accounts at different former employers to one IRA account eliminates administrative hassles. If you move, you only need to change address with one provider instead of several. You only have to remember one website login and password to change investment choices. Having the assets at one provider makes it easier to build a diversified portfolio. When the assets are spread around in several 401k plans, you have a harder time monitoring your portfolio and making sure you are not too concentrated in one asset class. Some clients find by having the all of their retirement assets in one location they take the account more seriously. They are more diligent in monitoring the account and the underlying investments. They are faster to make changes when things going well. Lastly, most providers (Fidelity included,) give customers a better deal for having more assets in their accounts. The better deal could come from lower fees, lower commission rates or additional free services.

2. 401k Plans are expensive – In addition to the fees charged by the underlying funds in a 401k plan, there is usually an administrative fee charged as a percent of assets. It is even worse because both sets of fees are opaque to the investor. By moving the 401k balance into an IRA, you will have transparency on the fees you pay. If you want to remain in mutual funds, you’ll be able to select a fund with reasonable expenses. If you decide to invest directly in stocks, you’ll just pay the commission to buy and sell the stock.

3. Broader Investment Choices – A Rollover IRA will have close to unlimited investment choices. On the other hand, a 401k plan will have limited options. Most have between 5 to 15 investment choices. Even the very good 401k plan at Goldman Sachs had only about 30 investment options. The major discount brokers have access to virtually every mutual and stock. I don’t see a reason to limit your choices. One might argue that only a high quality investment can get on a 401k platform, but in reality, who knows why those particular investment options are on a company’s 401k platform. Maybe someone on the investment committee has an unconscious affinity for particular brand of mutual funds or maybe the investment option won a place on the platform after good (but unsustainable) streak in the market. More options are better, and Rollover IRA have many more options than 401k plans.

4. Option to convert to a Roth IRA down the road – You have to rollover a 401k to a Rollover IRA, but once you have a Rollover IRA you can convert to a Roth IRA. A Roth IRA provides some advantages such as tax-free withdrawals, no minimum distributions at age 70 ½, and no penalties for certain early withdrawals. Starting in 2010, there will be no income limits on conversions from Traditional IRA accounts to Roth IRA Accounts.

5. Stale Investment Choices – By leaving your money in a 401k Plan, your investment choices may become stale. 401k plans change their investment options from time to time. Often, the 401k Plan will replace an existing fund with a similar fund and shift all of the 401k Plan participants’ investments to the new fund. Other times, a 401k plan may eliminate an investment option and there is no replacement or the replacement is different enough that the 401k Plan’s Trustees don’t feel comfortable shifting participants from the old fund to the new fund. In these instances, the 401k Plan will send you a letter telling you about the shift and asking you what to do. If they are not able to find you or you do not respond, your money is liquidated from the old fund and investment into the 401k Plan’s money market option, which is not a healthy long term investment. By moving your assets to an IRA, you want have to deal with this issue.

6. Tracking Your Investments – 401k Plans often invest in a separate account that clones an existing mutual fund. The separate account is traded alongside the mutual fund, but it may have a different fee structure. This makes tracking the underlying investments in a 401k Plan difficult if not impossible in popular portfolio management software such as Quicken, Microsoft Money or Yahoo! Finance.

7. Estate Planning – A Rollover IRA is better from an estate planning view. If you die before taking minimum distributions at 70 1/2, your named non-spousal heirs have the option to take your IRA assets and move them into IRA accounts under their name and extent the minimum distributions to their life expectancy. This gives your heirs the power of tax deferral over their lifetimes. There is not such opportunity with a 401k account held at the time of your death.

There are the several reasons I like to encourage clients to rollover 401k balances into an IRA account. If you have questions or a unique situation, please feel free to call, email or comment on this post.

Derek Pilecki
Gator Capital Management
derek.pilecki@gatorcapital.com
(813) 282-7870