Leaving an employer and planning to take retirement savings with you? In some cases, your money doesn't need to move on as badly as you do.
A 35-year-old worker who leaves savings with a former employer instead of rolling it into an individual retirement account that charges 30 basis points more in fees resulted in a balance that was about 10 percent higher by age 70, according to a statement this month from Hewitt Associates prepared for the Senate Special Committee on Aging.
That's the difference between a $366,424 balance and $404,105, according to Lincolnshire, Ill.-based Hewitt, a large provider of employer retirement plan services. (The example assumed a starting balance of $33,000 and average annual returns of 8 percent before fees.)
"In our opinion, 401(k) plan participants are at far greater risk of falling short in their retirement savings if they roll over their plan balances to a retail IRA compared with a mid- to large-sized company 401(k) plan," Hewitt said in the statement.
Large workplace plans today can offer several advantages over an IRA. They command low individual fees because of the size of their asset bases, many offer free investment advice, and some provide custom target-date retirement funds that blend top funds from different managers, a feature investors can't easily replicate on their own, said Alison Borland, co-author of the statement and leader of Hewitt's defined-contribution consulting practice.
What about the chorus of advisers that recommend rollovers because of the greater investment choices and access to alternative investments, such as real estate and commodities, that are scarce in company plans? And how about the complaints about hidden 401(k) fees that are prompting new Labor Department regulations and congressional proposals aimed at limiting fees?
The best answer for individual savers is to weigh their options, experts said.
Ultra-low fees are found at a relative handful of very large plans, said David Loeper, author of Stop the 401(k) Rip-off! Eliminate Costly Hidden Fees to Improve Your Life. Other investors frequently are stuck in plans that can't command big discounts and may have costly mortality expenses to pay for insurance products, wrap fees and marketing agreements. Such agreements, known as revenue sharing, can end up costing participants beyond what they see in their plan's stated expense ratio, Loeper said.
So how can savers determine their best strategy?
*Be aware of the biases.
Go into your decision realizing that experts you consult could have built-in biases. Financial advisers who are paid based on the amount of assets in your portfolio have a vested interest in having a larger pot of money outside of your company plan and under their control. A company retirement plan qualifies for lower costs as its number of participants rises.
As the Hewitt example shows, more expensive investments can make a big difference in a portfolio, particularly over several decades. In the example, the same 35-year-old worker would see her nest egg end up about 22 percent larger, at $445,539, if her employer plan fees were 60 basis points cheaper than her hypothetical retail IRA.
Just don't assume your company plan will necessarily be lower. Account fees on retail IRAs have been dropping for years (many are zero), and low-cost retail products, such as exchange-traded funds, could easily beat out a higher-cost 401(k) plan, said Daniel McNamara, managing director for Bank of America's planning and investment products group.
*Consider your age.
Workers older than 70 1/2 can suspend required distributions from 401(k) plans while they are still working, said Lisa Van Fleet, a partner and employee-benefits practice leader with law firm Bryan Cave LLP in St. Louis. So someone planning to continue working should consider rolling a 401(k) into another company plan instead of an IRA, she said.
Finally, be realistic about your own skills. If you start leaving retirement money with several former employers, will you keep every company updated on your whereabouts and manage the investment choices across all the plans?
If you roll your plan into an IRA, will you scrutinize fees and avoid excessive trading, or will your balance be a target for unscrupulous advisers?