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Rollover 401K vs. IRA?

I have two old 401K plans and have started with a new company over the past year. My financial adviser is recommending I roll my old 401K's into an IRA instead of rolling it into my new 401K plan. In independently researching 401K vs. IRA, I see benefits and disadvantages to each side, however I feel like 401K is the right way to go and that he is only pushing me to an IRA b/c he will make money only off of the IRA. Essentially, I feel like his opinion is biased based on his best interest, not mine.

Are IRA's definitively better than 401K or am I better off rolling over to a 401K and not having to pay the high initial costs to enter into an IRA?

Thank you

Apr 21, 2015 by Me in  |  Flag
3 Answers  |  4 Followers
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2 votes

You are right to be skeptical, but there is a definite advantage to IRAs, in my opinion. One is that you have more choices of how to invest, your withdrawal options are more liberal and less expensive, and you can move it if you like, where as in a plan you might be limited in all of these. It could also be that there are other costs associated with the plan, such as the cost of a third party administrator, and the costs of setting up the plan or making amendments or restatements. Many of these are not clearly known by the participant, and sometimes the employer pays those costs directly.

You could have an advisor that is trying to get you into an IRA to charge you commissions. Look for a "fee only" advisor. They are rare, but do exist, and they are not compensated by commissions or 12b1 fees. If you set up an IRA directly at Vanguard, the cost is very low, but you would have to determine the investments on your own, which could be a problem. Also ask the advisor if he is a "fiduciary", meaning he's required to recommend considering your best interest. Most will not claim a fiduciary level of responsibility unless they actually have it, but get it in writing.

All in all, you have a difficult choice. You are good to get info and research your options.

View all 4 Comments   |  Flag   |  Apr 21, 2015 from El Paso, TX
Christoph Chen

You have listed here the costs for a commission based mutual fund. If you plan to keep the mutual fund for a long time the sales charge would amortize over time such that the average cost over the ownership time may become reasonable. If you are not sure that you want to keep the funds for a while, then you may be better off with a no-load fund that does not charge a commission. As Billy was writing you may want to look for a fee only advisor. Another option could be to buy fee only funds or ETFs through a brokerage. The advantage of the latter is that the costs are less. The disadvantage is that there is no professional advice. I am afraid that it is difficult to evaluate your 401k with no information on it, and thus to evaluate whether it could be a viable option.

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Flag |  Apr 22, 2015
Me

Thank you for the feedback, Christoph. If there's anything I can provide in terms of info on my 401K to better evaluate, please do let me know.

Flag |  Apr 24, 2015

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2 votes

I agree with Billy that it is a choice that you need to investigate. Your new 401(k) may allow loans which means you can get money out (and pay it back) without having taxable income. You can't take loans from IRAs, so any money you take out will be taxable. Your 401(k) may or may not have "in-service distributions" prior to age 65 which means you may not be able to get money out while still employed (hardship exceptions may apply). IRAs do allow you to take money out (tax and potential penalties may apply). 401(k) plans usually have a menu of sub-accounts and you have to invest in funds on their menu (usually 12 to 20 investment options). IRAs held in a brokerage or advisory account allow you to invest in stocks, mutual funds and ETFs (thousands of investment options). If you are in a large plan, you likely have lower fund expenses than if you were in a smaller plan. Therefore, a larger employer plan may have advantages for keeping your money in the 401(k) that smaller plans won't. 401(k) plans usually allow you to move your money around without transaction costs or loads. If you move your money often (rebalance for example), you may be better served in a 401(k) plan. If you are a sophisticated investor, you can have a more sophisticated portfolio in an IRA. If you are not a sophisticated investor, the 401(k)menu of investment options will probably be fine for you. Finally, if your balance is smaller, you may be better served in a 401(k) plan. Larger balances may be better served in the IRA where the investment options are pretty much unlimited and trading costs won't matter. Hope this helps a little.

3 Comments   |  Flag   |  Apr 21, 2015 from Houston, TX
Me

Thank you, Tracy Lee. This is also great info. Not sure if the fee structure I pasted in my response to Billy's is in-line with the norm, or if this tilts it towards being unfavorable to get into the IRA the adviser is suggesting. If you have an opinion on that, as well, it would be great to understand.

Flag |  Apr 21, 2015
Tracy Lee Miller

The 5.75% front load (sounds like American Funds) means you won't make a penny until the fund exceeds 5.75% return. Since I am an investment advisor, I don't use retail loaded funds for this reason. You should ask the advisor if he/she has an advisory platform where you will pay a fee for the advisor's expertise and advice and get no-load or load-waived options. Usually, there is a minimum ($25,000 or $50,000) to get an advisory account. If you have this amount or more, you should probably go advisory, not retail ... and if your advisor is not licensed to do that, then find another advisor. If you have less than this, this is a factor that would lean towards keeping your assets in 401k. 401k plans have no loads (or loads waived). Even though investing for retirement is for the long-term, it is difficult to overcome the high load and will take several years for it to "wash out".

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Flag |  Apr 22, 2015 near Houston, TX
Me

Great info, Tracy, and you nailed it on American Funds. I'll have more than $50K, so sounds like I need to go advisory if I do go the IRA route.

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Flag |  Apr 24, 2015

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Laurie Itkin Level 2

The fees you have listed likely belong to an actively managed mutual fund. Your advisor could charge an upfront fee of up to 5.75%. But there also seems to be a contingent deferred sales charge of1% that could be assessed if you attempt to cash out of the fund before holding it a certain number or months or years. The total expense ration is reasonable as it is less than 1%. You can likely find that fund or a similar index mutual fund or exchange traded fund without having to pay an upfront or backend fee. This is how the advisor gets compensated for recommending that fund. Do you have the five letter code for the fund? Then you can research it yourself and find lower-fee alternatives.

View all 6 Comments   |  Flag   |  Apr 21, 2015 from La Jolla, CA
Me

To be honest, I'm not quite sure. It's a T. Row Price Lifestyle 2045 that I'm in and the Gross/Net Expense Ratio shown on the notice of Investment Returns & Fee Comparison is .76%. I wish I had a way to upload to show you what I'm looking at to see if I'm looking in the wrong area.

I don't see anything on the Comparisons sheet that looks like the American Funds, unfortunately.

Flag |  Apr 27, 2015
Me

Actually, that looks like it is it as far as expenses go. I looked at the Portfolio Expense Calculator and the only category that has a fee associated with it is the Gross Fund Operating Expense.

Gross Fund Operating Expense (%) .76%
Group Annuity Contract Charge (%), if applicable
FN1 Group Annuity Contract Charge (in dollars), if applicable
FN1 Total Estimated Annual Investment Option Expense FN2

Flag |  Apr 27, 2015

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