Be Wary of Advice to Do an IRA Rollover

If you have a 401(k) from a previous job, you've likely been urged to "take control of your retirement savings." The upshot of this ubiquitous Wall Street marketing message: To keep retirement savings on track, you should roll 401(k)s from former employers into a shiny new IRA.

Yet in their race to capture IRA rollover money, financial-services firms may be trampling investors' best interests, according to regulators and consumer advocates. Both the Securities and Exchange Commission and the Financial Industry Regulatory Authority have made examining firms' rollover IRA sales practices a top priority for 2014. The moves follow a 2013 report from the U.S. Government Accountability Office finding that 401(k) participants "are often subject to biased information and aggressive marketing of IRAs" when seeking help with their plans.

Among regulators' top concerns: Rollover IRA sales pitches may persuade workers retiring or changing jobs to roll 401(k) money into higher-cost IRA investments. And investors may not recognize the conflicts of interest that can color rollover advice.

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IRAs are now the biggest repository of retirement savings, holding $6.5 trillion, and rollovers added $324 billion to these accounts in 2013, according to Cerulli Associates. Yet workers shifting from 401(k)s to IRAs are leaving highly regulated plans where employers must act in participants' best interests for a less-regulated market where brokers are generally not required to put investors' interests first. "When you roll over into an IRA, you're absolutely in the Wild West," says Anthony Webb, senior research economist at the Center for Retirement Research at Boston College.

One sign of the intense competition to attract 401(k) participants' rollover dollars: Several major brokerage firms are offering $600 or more in cash and a pile of free trades to customers who roll over to an IRA. Such offers "should tell you something about how big their financial incentive is" to capture rollovers, says Barbara Roper, director of investor protection at the Consumer Federation of America.

Here are key considerations to help you decide whether to keep your money with your old employer, move it into a new employer's 401(k) or roll it into an IRA.

Read the fine print on 'no fee' IRAs. In its investigation, the GAO contacted 30 401(k) service providers, most of which offered their own IRA products. Seven of the 30 claimed that their IRAs were free and failed to clearly explain that investors could still pay investment- and transaction-related fees.

To be sure, participants in small 401(k) plans chock-full of pricey investment options may slash their fees by moving to low-cost funds in an IRA. But large employers tend to offer low-cost institutional funds that may not be available to individuals through IRAs.

Review your plan's annual fee disclosure, and search for your employer plan at BrightScope.com to determine whether your plan's fees are on the high or low end. And before rolling to an IRA, be sure you understand any annual account fees as well as fees for investment options, trades and account termination.

For participants in 403(b) plans—often employees of public schools—fees connected to an IRA rollover can bite particularly hard. Much of the money in these plans is invested in variable annuities that carry steep surrender charges, says Dan Otter, owner of 403bwise.com. The charges can take a big chunk out of 403(b) balances that are withdrawn within a certain time period. In such cases, "the smartest decision might be to let it sit, and only roll over money that's no longer subject to the surrender charge," Otter says.

Understand conflicts of interest. About 28% of 401(k) participants say their plan provider is their primary source of retirement advice, according to Cerulli. Yet these providers have clear incentives to steer 401(k) participants into their own IRA products, generating additional fees. GAO's investigation found that 401(k) call center representatives who had virtually no information about callers' financial situation still urged the savers to roll to an IRA.

The GAO's report urged the U.S. Labor Department to require that plan service providers disclose their financial interest in participants' rollover decisions and to clarify when providers must act in participants' best interests. Labor is expected to propose a new fiduciary rule that will address the issue in January. When seeking rollover advice, Otter suggests investors turn to a fee-only certified financial planner.

Weigh investment options. Many savers are attracted to IRAs because they offer a broad universe of investments rather than an employer plan's limited menu. But when it comes to investment options, more is not always better. Many older 401(k) participants, for example, invest in stable-value funds designed to protect principal and deliver steady returns—and it may be tough to find equivalent investments outside an employer's plan. And numerous studies have shown that retirement savers have better investment outcomes when presented with a more limited menu of options. Many 401(k) menus present a "reasonable selection of good options instead of a huge selection of good, bad and indifferent options," Roper says.

Consider rolling to a new employer's plan. Depending on plan fees and investment options, it may make sense for job-changers to roll over to their new employer's 401(k). (Again, check out your new plan on BrightScope and review its latest fee disclosure.) But in the GAO's investigation, just one of the 30 plan providers contacted offered help rolling over to a new 401(k) plan. And participants may face other hurdles when attempting to roll balances to a new employer's plan. Some plans, for example, impose waiting periods lasting weeks or months before accepting 401(k) balances from other plans.

What's more, employer plans are not required to accept rollovers from other company plans. Ask your new employer plan's administrator whether this option is available—and if it is, be prepared to navigate the paperwork required by your old and new employers on your own. "If you're doing a 401(k)-to-IRA rollover, you have a broker-dealer there to hold your hand," Webb says. "If you're doing a 401(k)-to-401(k) rollover, you've probably got the new employer's HR department, not holding your hand, but slapping it."

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