IRA Rollovers Can Have Steep Costs When Done Wrong, New Study Shows
What You Need to Know
Investors in 401(k)s may have access to lower-fee investments than they would in a rollover IRA.
New DOL rules require advisors to conduct a detailed analysis of whether, and why, a rollover would be in a client’s best interest.
Fees are not the only factor advisors need to compare in the rollover decision.
Rollovers from 401(k) plans to individual retirement accounts (IRAs) without expert guidance can cost savers a lot of money, as a recent issue brief from the Pew Charitable Trust illustrated. Funds frequently impose higher fees on retail share classes than on institutional shares, and the brief examined the long-term impact those higher fees can have on retirement savings.
Here’s an example from the study. A 65-year-old employee retires with $250,000 in her 401(k) account that generates an assumed 5% real annual return. She plans to withdraw $1,000 each month for her life expectancy of 25 years until age 90. The 401(k) plan charges a 0.46% annual fee and she rolls the account over to the same fund in an IRA that charges 0.65%.
Over the next 25 years, she’ll pay $37,091 in IRA fees versus $27,233 if she had kept the funds in her 401(k). At age 90, she’ll have $197,040 in her IRA versus $217,553 in the 401(k). The study provides two other examples with the same result: The IRAs’ higher fees add up and reduce the savers’ wealth over the long term.
DOL Regulations Impose More Rollover Requirements
The study makes a case that savers should consider leaving their savings in their former employer’s 401(k) because of the potential cost savings versus IRAs’ retail shares. It’s sound advice, but with the implementation of the Labor Department’s Prohibited Transaction Exemption (PTE) 2020-02, that evaluation is now a pre-rollover requirement for advisors and firms.
In its April 2021 guidance, New Fiduciary Advice Exemption: PTE 2020-02, Improving Investment Advice for Workers & Retirees Frequently Asked Questions, the DOL lists the factors advisors and firms should consider and document with each rollover analysis.
