When you retire or change jobs, you can roll over savings
from your 401(k) into a traditional or Roth IRA - and that is big business.
Nine of 10 new IRA accounts are rollovers, according to the Investment Company
Institute (ICI). Households transferred $288 billion from workplace plans to
IRAs in 2010, according to the most recent ICI data - but made only $12.8
billion in direct contributions. And the rollover numbers are expected to swell
as more boomers retire.
A rollover can make sense if you’re in a 401(k) plan with
bad investment choices or high fees, or if you want to take advantage of the
tax features of a Roth. But staying in the 401(k) is usually an option, and
often a good one. Big plans can negotiate low fees. And 401(k) plans are
subject to the fiduciary requirements of the Employee Retirement Income
Security Act (ERISA), meaning they must put the interests of account holders
first. Not so with IRAs.
With the TSP, the choice is clear. The plan has a simple set
of investment choices and ultra-low fees; its average net expense ratio last
year was just under three basis points (a basis point is 1/100th of 1 percent).
That’s much lower than most 401(k) plans, which had average mutual fund expense
ratios of 58 basis points in 2013, according to the ICI. And IRA expenses are
25 to 30 basis points higher than 401(k)s, according to the U.S. Government
Accountability Office.
None of that kept the IRA providers from giving Turner a
hard sell.
John Turner wondered if he should roll over his federal
government retirement account into an individual retirement account. So he contacted
seven mutual fund companies, seven banks and one insurance company. Most of the
call center “advisers” didn’t offer fee comparisons and tended to focus on the
narrow number of investment choices in the TSP compared with the myriad options
available to IRA account holders. One offered Turner a $600 cash incentive to
roll his account over, plus 300 free stock trades. Some companies gave him
false information - one claimed he could reduce his fees while rolling over;
one claimed that Turner had no control over his investments in the TSP.
An ICI spokesperson said mutual fund companies that provide
recordkeeping services to workplace plans give participants full information
about their options when they separate from the plan - including the option to
leave assets in the plan, where that is an option.
Still, the lesson from Turner’s research is clear: When you
call an IRA provider about a rollover, you’re getting a sales pitch, not
advice. And while you might argue that a Wall Street investment adviser
shouldn’t be expected to be knowledgeable about the TSP despite its enormous
size (total 2013 assets: $406.9 billion), Turner says some “but not all” of those
he spoke with claimed they were familiar with it.
But fees are a big issue. Turner calculates that a $150,000
rollover from the TSP would be 4.4 percent poorer after 10 years if rolled over
to an account charging 50 basis points; the loss would be 8.9 percent in an
account levying 100 basis points, and 13.2 percent at 150 basis points.
And you should beware the pitfalls of the "investment
choice" argument. Often it’s a come-on to get investors into higher-cost
actively managed mutual funds or to trade stocks, when most would be better off
with a simple menu of low-cost passive mutual funds.
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