Planning To Roll Over Your 401K To An IRA?

Years ago when I first worked the “front lines” talking to employees of some of the largest 401(k) plans, it seemed that many of the calls I received had something to do with employees who left or were leaving their employer. Often, people simply wanted to know “how to get their money” and we would discuss the various distribution options. Interestingly, some of the most heated conversations were automatic cash-outs. A little known regulation (at least to those calling) allowed employers to automatically send checks (a taxable event) to former employees with low plan balances. The rationale of course was that it became administratively expensive to keep former employee accounts, especially small ones, on the books.

In the past, majority of employers were quite comfortable with their employees pursuing rollovers since it was somewhat of a pain to keep administering these accounts. Not to mention, there was a cost to maintaining these accounts. But it seems that there has been a change in this basic sentiment held by companies. Apparently, the consulting firm Casey Quirk & Associates LLC, has found that around 2/3 of very large retirement plans are preferring to keep employee accounts intact even for workers who have already left their companies.

We all know that when a worker quits their job, they can do a rollover at any time, into an IRA. But it appears that there is a trend right now that shows that companies are quite interested in holding on to these employment accounts. And, what was already a confusing process for many employees, has become even more so.

Employers Want To Keep Your 401Ks

Why would this change? Well according to Allianz SE’s Pacific Investment Management Co , there’s almost $400 billion of assets in 401(k)s and similar retirement plans that are eligible to be rolled over into other vehicles this year. While it is obvious that every financial firm out there wants a piece of that action, for the first time, employers are more eager to hold on to these assets. For instance, certain companies and plan administrators are hoping to hang on to employee accounts by offering cheaper investment options, one-on-one investment advice, retirement planning and other retirement products like annuities. While others are instead making it harder for employees to perform rollovers, and are doing what they can to discourage the transfer process.

So why would employers want to hold on to your money? The number reason? Volume. With more plan assets, the company can negotiate better fees with mutual funds and brokerages. Also, more assets can give a company more clout: they can get access to other investment products that are not normally provided to general plans. Some of these interesting products include cheaper vehicles such as target date funds or other collective funds. With the expected surge in retirements from the well-known baby boomer generation, employers seem more eager than ever to hold onto these assets.

And, of course, large IRA players like Vanguard, Schwab, Fidelity, Scottrade, E*Trade etc. are fighting back by offering more services and tools such as blogs, online calculators, forums and maybe even additional resources and content in order to stand out to customers. Some companies even go so far as to give away cash for new rollover or retirement accounts. As examples, you can check out some brokers with special offers and promotions such as TD Ameritrade and E*Trade, that may dangle an extra $500 or free trades for each new sign up.

They All Want Your Retirement Accounts & Business!

So what does this all mean to you, the investor? Well personally, I think that investors are getting more options on both side of the fence –- from their former employer (who, frankly in the past was more a hindrance) and from financial firms. Asset-hungry firms are more than willing to offer enhanced services, flexibility, and in some instances cash for your business. On the downside, however, the process and options are more confusing than ever. When deciding what to do with an old 401(k), you must consider quite a few factors, from investment options and fees to taxes. While the 401(k) plan may offer investment choices not otherwise available to individual investors, it may also offer a more limited menu overall. And, a 401(k) plan’s fees can also be difficult to decipher. If you’re wondering what to do, here are some considerations to make to help you decide:

The best way to figure out which direction to take is to understand what is most important to you and your life goals. As with anything, tune out the noise and realize what the motive may be. No longer is your employer or former employer willing to let your assets go so willingly even if it is in your best interest. They too may have their interests at heart rather than yours. On the other side, investment firms are asset-hungry, so be wary of those ploys they have that are designed to get you in the door. Take a hard look at what they have to offer before transferring your brokerage accounts or switching brokers.

Created August 30, 2010. Updated October 4, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.