As baby boomers leave the workforce, they are faced with a big decision: what to do with their employer retirement plans. For many, these accounts comprise the bulk of their savings.
The fundamental choice is to leave the money in the employer plan or “roll it over” to an Individual Retirement Account (IRA). The conventional wisdom favors the “rollover,” but sometimes, the conventional wisdom needs to be challenged.
In the race to capture assets, financial institutions and their sales representatives usually recommend moving the assets to an IRA and it’s easy to see why. IRA rollovers out of employer-sponsored retirement plans can be a bonanza for advisors and their firms, generating commissions, fees and profits that they would not receive if the investments were left in place. Poorly informed retirees, even without the prompting of investment sales people, make this irrevocable decision carelessly without understanding the implications. The result can be excessive investment costs, higher taxes and lost opportunities. In fact, advisor abuse and poor choices by retirees have been so significant that they have raised the concerns of regulators.
There are certainly instances in which the best course of action may be to rollover your retirement funds to an IRA. For example, if your company’s future financial health is in question or the plan’s investment choices are inferior or carry high expenses, an IRA rollover would be favored. If managed properly, the IRA can offer more and better investment options and lower expenses than many retirees can get in their company plan. While more choice and lower costs are big pluses for moving money into an IRA, there are reasons that make leaving it where it is a smart decision. Here are two big ones:
* Professional oversight and transparency. 401(k) type plans are subject to strict federal laws. Individuals involved in the management and admins of these workforce plans are required to operate in a fiduciary capacity. In simple terms, they must act solely in the interest of the plan participants and their beneficiaries or face stiff penalties including jail time. IRAs are governed by much less stringent rules, increasing the chances that an unsuspecting retiree ends up in a high-risk investment recommended by an unscrupulous or incompetent salesperson.
* Creditor protection. Most employer plans are afforded broad protection from creditors under federal law. The Employee Retirement and Security Act of 1974 (ERISA), shields assets against creditors’ judgments in most cases. IRAs, on the other hand, are governed by state law and in many cases do not enjoy the same protections. The specifics are complicated and vary by state, but if lawsuits or other creditor actions are a concern, you should know that in general, your money may be tougher to get at if it stays inside an ERISA-governed company plan. If creditor protection is important but your company plan is particularly inferior to the IRA option, doing the rollover and buying a larger umbrella liability policy may make sense.
Your retirement accounts, whether they are employer-based or an IRA, offer tremendous tax-advantages that allow your savings to grow faster than other types of accounts. Handle them carefully and remember that your decisions may be irreversible. Neither your 401(k) nor your IRA is always the default for your retirement savings. To make an informed decision, do your research, establish what is most important to you, compare your options and understand how these options fit into your long-term financial plan.
John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com.
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.