I’ve rarely met an advisor who saw an opportunity for a rollover they didn’t want to take.
In many situations, rolling a retirement plan into an IRA makes sense, especially when the client is switching jobs or retiring. IRAs also offer more flexibility and control than employer-sponsored plans.
However, rollovers aren’t always advisable. Advisors can’t meet their fiduciary requirements by blindly recommending rollovers. What happens when you advise against rollovers? Let’s look at some factors that support leaving your clients’ money inside of retirement plans instead of recommending rollovers.
1. Distribution Options
Many employer-sponsored retirement plans offer more distribution options than just a lump-sum distribution amount. By law, defined benefit plans must offer an annuity form of distribution. While many 401(k)s don’t offer an annuity or pension-style distribution option, if the plan has multiple distribution options, they should be reviewed before taking a lump sum.
Some of the lifetime distribution options available from a qualified retirement plan are significantly better than anything you could purchase for your client on the open market or inside of an IRA. By taking a lump sum and doing a rollover, you might leave a lot of value on the table, harming your client’s retirement security. Before any rollover, make sure you understand the distributions options your client has available in their employer-sponsored retirement plan.
2. Investment Fees
Many IRAs have become cheaper with some trading commissions at large custodians going to $0 on ETFs and single stocks. Additionally, fee compression has brought down the cost of many investment options. In general, though, large 401(k) plans tend to have the lower investment fee costs and plan costs. Firms like Vanguard released data that show their large 401(k)s have some of the lowest investment fees in the industry. Rarely do 401(k)s have trading commissions, but trading fees are still more likely inside of an IRA. And if you’re looking to wrap your planning fee on the new assets in the IRA, it could add a new cost to your client.