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IRA rollovers are common for job changers, retirees
Investors rolled $ 516.7 billion from workplace plans to traditional IRAs in 2018, the last year for which data is available. That’s almost 28 times more money than was contributed to the traditional IRA that year.
A Pew survey from 2021[ads1] found that 46% of recent retirees put at least some of their workplace pension funds into an IRA, and 16% of local retirees plan to do so.
A rollover may not be optional either: About 15% of 401 (k) plans do not allow workers to keep funds in the plan when they retire, according to a survey conducted by the Plan Sponsor Council of America, a trade group.
How much money rollover IRA fees can cost investors
The typical “hybrid” fund in a 401 (k) plan is 0.19 percentage points cheaper than the same fund available to IRA investors, according to the Pew study. (A hybrid fund has both equities and bonds.)
The difference in fees, which can seem insignificant, amounts to a lot of money over many years.
Using these numbers, Pew estimates that investors who rolled over in 2018 would have lost around $ 980 million in a year due to additional fees. Over 25 years, their nest eggs will be reduced by about $ 45.5 billion in total due to fees and lost revenue, according to the analysis. It’s only from a single year’s turnover.
The typical fee difference in 401 (k) plans versus IRAs is even greater for equity funds and bond funds – 0.34 and 0.31 percentage points, respectively.
Mutual fund share classes have different fees
Pews analysis examines fees according to the mutual fund’s “share classes.”
Basically, the same fund can have several share classes that carry different fees, also called a “cost ratio”. They fall into two basic camps: “institutional” stocks, which have higher investment minimums and are generally available to employers and other institutions; and “retail” stocks that have lower minimum requirements and are generally intended for individual investors.
Institutional shares generally have lower fees than retail shares.
The Pew study assumes that a 401 (k) saver invests in the institutional version of an equity fund, while a rollover will be for the retail version of the fund. The study estimates how such a transition can affect individual pensioners under different circumstances.
In one example, a 65-year-old woman who loses $ 250,000 in 401 (k) will end up with around $ 20,500 less in savings at 90 years due to higher IRA fund fees, given certain conditions – a “significant loss for a person living on a fixed income, “said the study.
These assumptions include: annual fees of 0.46% and 0.65% in a 401 (k) and IRA, respectively; an average annual return of 5%; and $ 1,000 monthly withdrawals to supplement Social Security benefits.
What to consider before rolling over pension funds
When deciding whether to leave assets in a workplace retirement plan or roll them into an IRA, there are many factors to consider:
- Cost. The fees will not always be higher in an IRA compared to a 401 (k) plan. Not all 401 (k) plans use cheaper “institutional” stocks. Many IRA funds can be cheaper than those in your workplace plan. Those who want to roll over should look for funds with similar or lower expenses relative to funds they owned in 401 (k), Pew said.
- Convenience. IRAs can serve as a central repository for all or most of your retirement assets, Scott said. Individuals with multiple 401 (k) accounts can roll all the money into one IRA, which can be easier for some savers to manage.
- Flexibility. Many 401 (k) plans may not allow as much money withdrawal as retirees want. For example, almost 31% of 401 (k) plans did not allow partial or periodic withdrawals in 2020, according to the PCSA survey.
- Investment options. Overall, savers can benefit from leaving money in 401 (k) when leaving an employer if they are happy with their investments, according to the report. But it is also worth noting that your investment options in a 401 (k) are limited to those chosen by your employer and planning administrator. With an IRA, the menu is much wider. Certain pension investments such as annuities are largely unavailable to 401 (k) savers as well.
“There are certainly a lot of situations where a rollover would make sense,” Scott said.
“Veltingen [itself] is not the problem, “he added.” It really is to understand what the fees are. “