Jaime, a longtime client, came in to ask me about rolling over her 401(k) to an IRA. “David, I’ve been considering rolling over my 401(k) from my previous job into an IRA. What are the pros and cons of doing this?”
“That’s a good question,” I said. “Rolling over your 401(k) to an IRA has both benefits and potential drawbacks. Let’s look at the upside first.
“Investment Flexibility is a plus. IRAs typically offer a wider range of investment options compared to most 401(k) plans, including stocks, bonds, mutual funds, and ETFs. This flexibility allows us to tailor your investments to suit your risk tolerance and financial goals.
“Here’s another: Rolling over can simplify your financial life by consolidating multiple retirement accounts into one. This makes it easier to manage and track your investments.
“And with an IRA, you’ll have direct control over your investment choices, which is advantageous if you are an experienced investor or, of course, if you’re working with a retirement planning expert and want them to have the greatest flexibility to make recommendations.
Jaime took a sip of her coffee. “Sounds like a no-brainer to me.”
“Not necessarily,” I cautioned. “Some IRAs come with higher fees than 401(k) plans, especially if you are not careful about selecting low-cost investments. These fees can erode your retirement savings over time.
“And one of the biggest pitfalls, which was recently highlighted in research by Vanguard, is the risk that your rollover funds will sit in cash for extended periods. When you roll a 401(k) over to an IRA, the funds often get moved as cash. Unless you promptly reinvest them, they sit idle and miss out on market gains.
“Also, 401(k) plans have certain creditor protections under federal law that IRAs do not. Depending on your financial situation, this could be a critical consideration.
“What can go wrong? Can you give an example?”
“I read about a case where a couple rolled over $400,000 from their 401(k) into an IRA. They didn’t realize the funds were sitting in cash for over a year, and during that time, the stock market made significant gains. That oversight cost them over $100,000 in missed opportunities.
“Vanguard’s study found that nearly a third of those who rolled their savings into IRAs left the money in cash for years. This can be a costly mistake, especially for younger workers who have decades to benefit from compounded growth. Americans with cash-heavy IRAs give up more than $172 billion a year in retirement wealth they could have generated by investing in stocks and bonds.”
“I had no idea,” said Jaime, “but isn’t this an avoidable mistake?”
“Yes. The key is to be proactive. If you do decide to roll over your 401(k) into an IRA, you should have a plan in place. That’s one of the benefits of working with a Retirement Planning Consultant”.
“What if I do not have a plan in place”, said Jaime “then what should I do?”
“In that case the best course of action maybe no course of action, which means keeping your money in your previous employer’s 401(k). That can sometimes be simpler and safer. Remember the grass is not always greener on the other side”
The decision to roll over a 401(k) to an IRA should not be taken lightly. While the potential for greater investment flexibility and consolidation is appealing, the risks of hidden fees, lost protections, and missed market gains can significantly impact your retirement savings. Always take the time to understand the full scope of your options and seek the advice of a qualified Retirement Planning Expert.
Why navigate the rocky waters of retirement planning without a compass? Ask the experts at Concierge Retirement Services to create a custom plan that suits your unique needs and circumstances.