As you near retirement, you hire a financial planner to help manage your investments. Expect three things to happen:
1. The adviser will ask to see account statements for all your assets—and devise a comprehensive strategy to invest those assets in a prudent, diversified manner that aligns with your goals and risk tolerance.
2. In crafting the strategy, the adviser will understandably want to consider assets that you hold elsewhere. Examples include defined-contribution plans such as a 401(k) or 403(b) that you get through your employer.
3. The adviser will urge you to move all your money, including workplace accounts, to their firm.
It’s that last request that may or may not make sense. Advisory firms love to hold all of a retiree’s assets.
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Skeptical consumers might think, “They want to scoop up all my money so they can collect more fees.” While that may be true, there are also valid reasons for advisers to suggest that you close employer accounts and transfer the funds to them.
Your job is to weigh pros and cons. Ask smart questions before you shut down employer-sponsored accounts and move money to your adviser.
For starters, scrutinize your workplace plan to determine the range, cost and quality of your menu of investment options. Some plans offer a vast array of reasonably priced funds managed by reputable financial services companies. Others limit your choices or only include chronically underperforming funds that come with disproportionately high fees.
“Fifteen or 20 years ago, a 401(k) or 403(b) may have had lousy options,” said Allan Roth, an adviser in Colorado Springs, Colo. “About 60 to 70% of the time, I used to recommend rolling over a 401(k) into an IRA to get better options. Now, it’s 5 to 10% of the time because 401(k)s have gotten so much better.”
Consolidating accounts also simplifies record-keeping and portfolio tracking. Wealth management firms often provide clients with a secure online portal that enables them to follow their investments in real time with constantly updated data on asset allocation, risk level and performance comparisons.
Of course, these digital tools come with a downside. Clients who frequently check their holdings may balk if their returns lag market benchmarks such as the S&P 500 SPX, -1.03%.
Advisers who charge a percentage of assets under management (such as 1%) — and buy safe U.S. Treasury securities yielding well under 2%—can leave clients wondering if they’re getting their money’s worth by using an advisory firm. That can lead an adviser to place bigger bets to outperform the market.
“They might put your money into risky investments like MLPs [master limited partnerships] and junk-bond funds” to juice returns, Roth warns.
Fees can also take a bite out of returns. Rolling over an employer account into an IRA can trigger higher costs, depending on the fund expenses inside the IRA.
Before agreeing to move their money into an IRA held at the adviser’s firm, Roth urges clients to ask, “If I do this, what would my total fees be including your assets-under-management fee, the expense ratio of the underlying investments and any other costs I should be aware of?”
Advisers can add value by reviewing the details of your employer’s plan to decipher the administrative and record-keeping fees you’re paying for your 401(k). They might conclude that if your plan offers a diverse mix of low-cost investment options, you should stick with it. Plus, the Employee Retirement Income Security Act (ERISA) protects assets in most employer-sponsored retirement plans while IRAs are not covered by ERISA.
“We ask our clients to go to their HR [human resources] department to get plan documents so we can review them,” said Trisha Qualy, a Minneapolis-based certified financial planner. “Some of those documents can be confusing when it comes to understanding the fees. And the expenses that an employee pays can differ from the expenses that an ex-employee pays.”
That’s why she instructs her clients to ask their HR representative, “Will there be any changes to my plan’s fees if I’m no longer an employee?”
If you intend to retire in your late 50s, special considerations come into play. Both 401(k) and 403(b) plans allow individuals 55 and older to access their funds without a tax penalty. Holders of traditional IRAs must wait until they turn 59 ½ to avoid an early-withdrawal penalty.
“So if you anticipate needing assets between ages 55 and 59 ½, you may want to leave money in your 401(k),” Qualy said. “That gives you flexibility in the distribution of your assets.”
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