Risks of the 401k to IRA Rollover

When people retire with a 401(k) balance or a pension plan, there’s an army of financial salespeople trying to get them to rollover that money to an IRA managed by the financial salespeople or their associates. That can be a good deal, but apparently for many people it isn’t. They aren’t financial sophisticated and get duped into turning their accounts into commission- and fee-generating machines for the salespeople, according to a Bloomberg study. In Retirement Watch we’ve discussed when a rollover is appropriate and when it isn’t, and what to do when you decide to roll over 401(k) or other money.

Once workers exit a company, they generally can leave the money behind, roll it over into an IRA, transfer it to another 401(k) or cash out and suffer a huge tax hit. In a rollover, customers set up IRAs with financial companies, preserving their tax deferral.

Though 401(k)s offer fewer choices than IRAs, large companies such as AT&T negotiate for institutional discounts on the funds they select. As a result, 401(k) participants paid less than half the average 1.4 percent annual expenses charged to all U.S. stock mutual-fund investors, according to a 2013 study from the Investment Company Institute, a Washington-based mutual-fund industry trade group.

Still, almost 18 million U.S. households hold IRAs that include rollover money, estimated a recent report from the Investment Company Institute.