We’ve all seen or heard it dozens of times. Tune in to a financial radio show or TV program, hit a website, or merely look at a sign on a broker’s window and you will likely be told that you must roll your 401(k) out your prior employer’s plan and into an IRA. Why would you want multiple accounts with several former employers when you can consolidate all of your assets into one IRA? How do you keep track of all of those old balances?
These questions are certainly valid, but before you leap into a mutual fund family’s IRA product, it is important to examine the fees you will pay for the IRA versus the fees you will pay to stay in your prior company’s plan. These fees not only include the direct fees charged to your account, such as the annual account and/or administration fee, but also the underlying expense of the mutual funds or other investments offered. Not all funds are created alike, and most funds have multiple share classes that, while having the same underlying investments, have different fund expense. Most often, because the plan you are in is much larger than just your balance, the plan can use lower cost share classes than you can replicate in your IRA. This lower cost results directly into better investment returns.
In addition to expenses, consider how active you want to be in your own investments. Your prior employer’s 401(k) is most likely managed by a professional and you, even as a former employee, have access to their expertise. If you choose the IRA route, be sure to understand what level of advice you have access to and at what level you are comfortable managing your account.
This analysis is particularly true when your prior plan is managed by a bundled provider and they are soliciting you to move to their own IRA product. Why would they do that? If they were making more money off of you in the 401(k) plan than they make in their IRA, wouldn’t rather leave you in the 401(k) plan? The fact is that the IRA is more lucrative for the mutual fund company so of course they want the rollover.
A better approach may be to understand the fees you are paying in your current employer’s plan and see if it makes sense to consolidate your prior employer balances there. It is likely that this consolidation will simplify your life without incurring the additional IRA fees.