To rollover or not rollover, that is the question, Part 2

In my last post I began discussing one of the most talked about areas of retirement planning – whether or not to roll your old retirement savings plan (401k, 403b, 457b being the most common plan types) to your new company or a Rollover IRA.  This is a question that a majority of workers will be faced with at least once in their career.  I won’t rehash all the information from the last post, but I do want to point out what I believe is the correct answer to this question.  I believe it depends.  It may be more beneficial for you to roll your former plan over, or it may be more beneficial for you to allow it to remain right where it is.  The point being, you have to take the action that you think best benefits you-what is ultimately in your best interest is your primary concern.

Let me provide you with a few points that you should strongly consider when deciding whether or not you would want to roll your funds over to a new provider or Rollover IRA (by the way, I am not ranking these points in order of importance).

The first thing to consider would be fees (now some would probably argue this is the most important point to consider).  If you work for a sizeable company, chances are your retirement savings plan contains mutual funds or collective trusts shares that are known as Institutional class shares.  Why is this important?  Here is why – the Institutional class shares have the lowest internal fees, known as expense ratios.  An expense ratio is the annual fee the fund charges the shareholders.  This fee covers the management costs, trading costs, marketing costs, operating costs, and any other cost of maintaining that fund.  Clearly, the lower the better for you as the shareholder.  The lower the cost, the higher the relative performance of the fund (i.e. if a fund had a 10% rate of return and its expense ratio was 1%, you would see a 9% total return for that fund, but if the expense ratio was 0.50%, the return you would see would jump to 9.5%).  If you want to purchase Institutional class shares outside of an employer sponsored plan, you will typically need over $1,000,000 (sometimes several million $), or they are usually part of an account known as a wrap-fee or fee-based account.  Typically, you will have Institutional class shares in your wrap-fee investment account, but you will pay an annual fee, charged quarterly (the fee varies but is usually around 1% of the total account value, and it is an ongoing fee for as long as you have the account) in lieu of commissions.

Another point to consider is the investment options that are available to you.  In your employer-sponsored plans, you are limited to the investment choices provided by your employer.  Most employer-sponsored plans will have between 10 – 25 investment options.  What if you want to invest in something that is not part of their investment lineup?  You may have an option of opening a self-directed account with the investment provider of your employer-sponsored plan, but that option is not guaranteed.  Most likely, you are restricted to the specific investment choices of the employer-sponsored plan.  A Rollover IRA, on the other hand, can provide you with thousands of potential investment choices and options.  The “downside” if you will, is you may find you have to pay more (pay more in commission costs or higher expense ratio costs as previously mentioned) for having this additional flexibility.  One retirement plan I am assigned to has a low-cost Vanguard S&P 500 Index fund as an option.  The fund has an expense ratio of just 0.04% per year.  In order to purchase this fund outside the retirement plan, you would need a $5,000,000 initial investment, or it could be part of a wrap-fee fund lineup where you would have to deal with the additional costs of the wrap account.  It is very important to consider the investment choices in the respective plans when trying to decide whether or not to roll your account over.

One reason many people do in fact choose to roll their accounts over to one location is for the sake of convenience.  I believe this reason becomes more relevant the closer you are to retirement (or if you are already retired) and if you have several previous retirement plans outstanding.  I once had a client who was 72 years old, and his wife was 70 years old.  He had opened small IRAs with mutual fund companies and a couple of local banks over the past 25 years (23 different account to be exact).  He was doing this as a means of “diversifying” his holdings (although 21 of the 23 funds were large-cap growth mutual funds, look for a future blog post dealing with “overlapping investments”), and he thought it was wise to set “a little money aside whenever he had the chance.”  The issue now that he was older was his wife had literally no idea as to where the accounts where even located.  In this case it made complete sense to begin consolidating those accounts for beneficiary purposes to make things easier for his wife should something happen to him, but it also made sense from an investment management standpoint as well.

Again, there are both positives and negatives to both rolling over a retirement account or leaving it where it currently is.  My advice is do your homework, search out the best option for you.  It is your money and ultimately you are responsible for doing what is best for that money.  If you are so inclined, find a financial professional you can work with to help you reach your financial goals that you trust.  When I say trust, I mean you would trust them to do what is in your best interest at all times.  To place your interests above their interests and their companies interests.  That is a fiduciary standard, by the way, and while it is not required of all financial professionals, you should seek one that holds himself or herself to such a standard.  Until next time….


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