If you have a 401(k) from a previous job, you've likely been
urged to "take control of your retirement savings." The upshot of
this ubiquitous Wall Street marketing message: To keep retirement
savings on track, you should roll 401(k)s from former employers
into a shiny new IRA.
Yet in their race to capture IRA rollover money,
financial-services firms may be trampling investors' best
interests, according to regulators and consumer advocates. Both the
Securities and Exchange Commission and the Financial Industry
Regulatory Authority have made examining firms' rollover IRA sales
practices a top priority for 2014. The moves follow a 2013 report
from the U.S. Government Accountability Office finding that 401(k)
participants "are often subject to biased information and
aggressive marketing of IRAs" when seeking help with their
Among regulators' top concerns: Rollover IRA sales pitches may
persuade workers retiring or changing jobs to roll 401(k) money
into higher-cost IRA investments. And investors may not recognize
the conflicts of interest that can color rollover advice.
IRAs are now the biggest repository of retirement savings,
holding $6.5 trillion, and rollovers added $324 billion to these
accounts in 2013, according to Cerulli Associates. Yet workers
shifting from 401(k)s to IRAs are leaving highly regulated plans
where employers must act in participants' best interests for a
less-regulated market where brokers are generally not required to
put investors' interests first. "When you roll over into an IRA,
you're absolutely in the Wild West," says Anthony Webb, senior
research economist at the Center for Retirement Research at Boston
One sign of the intense competition to attract 401(k)
participants' rollover dollars: Several major brokerage firms are
offering $600 or more in cash and a pile of free trades to
customers who roll over to an IRA. Such offers "should tell you
something about how big their financial incentive is" to capture
rollovers, says Barbara Roper, director of investor protection at
the Consumer Federation of America.
Here are key considerations to help you decide whether to keep
your money with your old employer, move it into a new employer's
401(k) or roll it into an IRA.
Read the fine print on 'no fee' IRAs.
In its investigation, the GAO contacted 30 401(k) service
providers, most of which offered their own IRA products. Seven of
the 30 claimed that their IRAs were free and failed to clearly
explain that investors could still pay investment- and
To be sure, participants in small 401(k) plans chock-full of
pricey investment options may slash their fees by moving to
low-cost funds in an IRA. But large employers tend to offer
low-cost institutional funds that may not be available to
individuals through IRAs.
Review your plan's annual fee disclosure, and search for your
employer plan at
to determine whether your plan's fees are on the high or low end.
And before rolling to an IRA, be sure you understand any annual
account fees as well as fees for investment options, trades and
For participants in 403(b) plans--often employees of public
schools--fees connected to an IRA rollover can bite particularly
hard. Much of the money in these plans is invested in variable
annuities that carry steep surrender charges, says Dan Otter, owner
. The charges can take a big chunk out of 403(b) balances that are
withdrawn within a certain time period. In such cases, "the
smartest decision might be to let it sit, and only roll over money
that's no longer subject to the surrender charge," Otter says.
Understand conflicts of interest.
About 28% of 401(k) participants say their plan provider is their
primary source of retirement advice, according to Cerulli. Yet
these providers have clear incentives to steer 401(k) participants
into their own IRA products, generating additional fees. GAO's
investigation found that 401(k) call center representatives who had
virtually no information about callers' financial situation still
urged the savers to roll to an IRA.
The GAO's report urged the U.S. Labor Department to require that
plan service providers disclose their financial interest in
participants' rollover decisions and to clarify when providers must
act in participants' best interests. Labor is expected to propose a
new fiduciary rule that will address the issue in January. When
seeking rollover advice, Otter suggests investors turn to a
fee-only certified financial planner.
Weigh investment options.
Many savers are attracted to IRAs because they offer a broad
universe of investments rather than an employer plan's limited
menu. But when it comes to investment options, more is not always
better. Many older 401(k) participants, for example, invest in
stable-value funds designed to protect principal and deliver steady
returns--and it may be tough to find equivalent investments outside
an employer's plan. And numerous studies have shown that retirement
savers have better investment outcomes when presented with a more
limited menu of options. Many 401(k) menus present a "reasonable
selection of good options instead of a huge selection of good, bad
and indifferent options," Roper says.
Consider rolling to a new employer's plan.
Depending on plan fees and investment options, it may make sense
for job-changers to roll over to their new employer's 401(k).
(Again, check out your new plan on BrightScope and review its
latest fee disclosure.) But in the GAO's investigation, just one of
the 30 plan providers contacted offered help rolling over to a new
401(k) plan. And participants may face other hurdles when
attempting to roll balances to a new employer's plan. Some plans,
for example, impose waiting periods lasting weeks or months before
accepting 401(k) balances from other plans.
What's more, employer plans are not required to accept rollovers
from other company plans. Ask your new employer plan's
administrator whether this option is available--and if it is, be
prepared to navigate the paperwork required by your old and new
employers on your own. "If you're doing a 401(k)-to-IRA rollover,
you have a broker-dealer there to hold your hand," Webb says. "If
you're doing a 401(k)-to-401(k) rollover, you've probably got the
new employer's HR department, not holding your hand, but slapping