To roll, or not to roll your 401(k)

Rolling your 401(k) or 403(b) into an IRA can be a good idea for some savers but not for others. Here are some things to think about before you make a decision.

In my last column, I outlined some of the more obvious reasons for rolling over your retirement accounts: cost savings, larger selections of investment choices, more flexibility. I also discussed some of the cons against rolling it over: the ability to borrow against your 401(k), a lower age for beginning distributions from your 401(k) (55, versus 59 ½ for an IRA), the ability to delay minimum required distributions after 70 ½, if you are still working.

This week, I want to focus on one of the greatest weaknesses of just about all employee tax-deferred retirement accounts. When the public and private sector came up with the concept of tax-deferred retirement accounts to replace pension funds, they forgot one extremely important detail. Pension funds for a company’s employees were managed by full-time professionals.

That makes sense because managing retirement savings is a full-time job. Unfortunately, the government ignored that fact when they gave the responsibility of managing tax-deferred retirement savings to the worker. Few workers are qualified to do that. They are totally focused on the full-time job of making a living, getting ahead and providing for one’s family, as they should be.

Even if they had the education, knowledge and skill to manage money, (which most don’t), they have few resources to do that job successfully. And as years of contributions have accumulated, many retirees now have hundreds of thousands of dollars (if not millions) invested in these employee-sponsored plans.

At the same time, the financial markets have changed enormously. It is a world of derivatives, leveraged investments and the commoditization of everything from individual stocks to Bitcoin, the individual investor is increasingly outgunned.

As a result, most 401(k) contributions are funneled into funds that automatically change your exposure to bonds and stocks based on the date you plan to retire. These target date retirement funds tend to be expensive and have a number of unintended consequences. One of which is that the closer you get to retiring, the more bonds are added to your portfolio (since bonds are considered a safer investment). In an environment where interest rates are rising and bond prices are falling, however these “safe” investments are fraught with risk.

In today’s constantly-changing, global financial markets, the set-it-and-forget-it approach to investments does not work very well, just witness the debacle in losses back in 2008-2009 to most savers’ 401(k) assets.

By rolling over your 401(k) to an IRA, the option of professional money management becomes available. It is one of the reasons that brokers, annuity salesmen and investment advisors are so focused on the area. This “gold rush” by the financial community to manage these assets has led to a myriad of abuses. Unscrupulous brokers, financial planners and advisors have stuffed these rollover accounts with high-priced investments with sub-par returns that have generated big commissions and fees for their firms while stiffing the poor retirees.

Worst of all, countless elderly retirees have been sold annuity products that are not federally-insured or regulated. These restrictive investments are inappropriate for the vast majority of savors. They command some of the highest fees of almost any investment product (as much as 15-20% of the entire investment over the lifetime of the annuity contract). What’s worse, if you try to sell them (as many do) they are saddled with huge penalties for years.

Money management, on its own, is no panacea; there are good advisors and bad ones, so you still need to do your due diligence. Make sure that whoever you select is registered, is a fiduciary and, if possible, offers more than just money management. In planning for retirement there are a number of other areas besides money management that are important, everything from financial and estate planning to Medicare, social security and elder care issues.