Millions of Americans change jobs every year, often leaving behind their 401(k) funds. They can roll those funds into an IRA or into their new 401(k) plan if that’s permitted, but many do nothing. Then the money remains with the original 401(k) plan unless the balance is small enough to be “forced out” into an IRA.
Those IRAs invest in short-term securities in order to abide by Department of Labor safe harbor rules and charge fees that often exceed their returns. The result is “billions of dollars” worth of retirement funds “poorly invested for the long term,” according to a December 2014 GAO report.
FeeX, a free service that tracks the hidden fees in retirement and investment accounts, has just introduced a service that can help both types of investors. The FeeX Concierge service analyzes the fees of inactive 401(k) plans and then recommends whether an investor should keep their funds with the original plan or move it into a low-fee IRA.
“We estimate that there are 50 million inactive 401(k) accounts that need to be rolled over – that’s billions of dollars of potential savings left on the table,” said CEO Yoav Zurel, in a statement. “FeeX has found that 95% of 401(k) plans turn out to be inferior to an IRA especially in terms of the amount of fees a participant will pay.”
Those fees average 1.27% of assets annually, while the fees for an IRA accounts can be as low as 0.18%, according to FeeX.
Zurel explained in an interview that every 401(k) plan has two types of fees: expense ratios for the funds and administrative fees for the plan. Those administrative costs can run as high as 50% of total fees and “they don’t exist in an IRA,” said Zurel.
FeeX analyzed the fee disclosure forms of more than 2,200 401(k) plans filed with the DOL, representing 50 million plan participants, and it found that “about 90%” are candidates for an IRA rollover because of the mix of funds and fees, said Zurel. “The plans are either inferior to IRA funds or, best case, they are equivalent to what you can get in an IRA,” said Zurel, but the 401(k) plans have additional administrative fees.
“The majority of people [who leave their jobs] should roll over,” said Zurel. “But if you have a great 401(k) plan like Google, whose funds are actually superior to any kind of funds you can find in a regular IRA … and low cost, you should keep it where it is.”
There are other reasons to retain the original 401(k) plan and avoid a rollover, including whether the 401(k) plan includes company stock that has appreciated in price, which could have tax consequences in a rollover IRA.
His recommendation to investors and their advisors: “Check” the investment mix and fees in the original 401(k) plan, then compare investment options and fees with a low-cost IRA.
Investors can do that by signing up at the Feex.com website which will connect to the inactive 401(k) account or forced IRA rollover. “We work with thousands of financial institutions and are very secure.” Then the site will search for the lowest-fee portfolio from among five low-fee investment firms: Betterment, ETrade, Scottrade, TD Ameritrade and Vanguard. (Firms pay FeeX for client referrals.)
Once the user decides from among the options, FeeX Concierge starts the administrative process of rolling over the inactive 401(k) to an IRA. The process takes just minutes, according to FeeX.
— Related on ThinkAdvisor: