Rock and Rollover

As the job market improves, more workers are leaving old jobs for new ones. According to the Labor Department’s Job Opening and Labor Turnover survey (JOLTS) the number of voluntary quits increased by 15 percent at the end of May. Upon departure from your old employer, one of the big decisions to make is what to do with your retirement plan. There are generally three choices: leave the money in the old plan; rollover the funds from the old plan into the future employer’s plan; or rollover the funds into a IRA account at a brokerage or mutual fund firm. To determine which option is best, you have to do a little homework. The first step is to figure out the fees you are paying in your current plan and compare them with the details of the new plan. While there has been more publicity about the high costs of investing inside of employer-sponsored plans, including last year’s terrific PBS episode of Frontline called "The Retirement Gamble", many people still don’t realize that fees among plans and the specific investments within the plans, can vary dramatically.

If the old plan offers plenty of choices at a reasonable expense level, and the new plan is an expensive one, you may be better off staying put. But increasingly, more Americans who are retiring or moving onto new jobs are transferring the assets from old plans into individual retirement accounts (IRAs). According to financial-services research firm Cerulli Associates, investors moved $321 billion from employer-sponsored plans to individual retirement accounts in 2012, up about 60 percent in the past decade.

Some of these investors want the freedom to control where they put their money and want to increase the number of asset class options inside their retirement accounts. However, many have fallen prey to the financial services industry, which has waged a competitive war for retirement dollars that aims to retain and capture retirement assets. Some firms offer cash incentives to roll over assets, while others offer a variety of “bonuses” that can seem too juicy to turn down. As a result, some investors are being unknowingly lured into products that contain higher fees than the plain vanilla index fund found in their old employer’s plan.

Because the government oversees and enforces most employer-based retirement plans there is a keen interest in how rollovers are handled. Specifically, the feds are concerned that the advice to move assets from an employer plan into a new product inside an IRA, may be "suitable" for investors, it may not but not in their best interests.

The distinction brings up the “F-Word”, or the fiduciary standard, which requires financial professionals to act in the best interests of their clients. You may think that any broker or insurance agent is obligated to do so, but they are generally held to a much looser standard, called “suitability.” In other words, the product or advice they are providing needs only to be suitable for you, rather than in your best interests.

Both the Department of Labor Securities and Exchange Commission (SEC) have been wrestling with whether to extend the fiduciary standard of care to any financial professional that provides personalized investment advice to retail customers, including those individuals and firms who make retirement plan recommendations. Last year the U.S. Government Accountability Office found that financial companies that administer 401(k) plans misled GAO investigators posing as employees leaving their jobs, telling them they would almost always be better off if they shifted to IRAs that the companies also managed.

Not surprisingly, the Securities Industry and Financial Markets Association (SIFMA), the trade association that lobbies on behalf of the financial services industry, has opposed imposing regulation that would be too strict, because it would “limit consumer choice”. The more cynical will note that the fiduciary standard would put a big dent into commissions generated by firms and their salespeople, especially those who recommend fee-rich products inside rollover accounts.

Before you transfer assets from retirement plans into IRAs, make sure that you understand the costs involved. You may find that the boring old 401(k) plan is the more efficient – and less complicated – option.