Pros and cons of 401(k) and 403(b) rollovers

A “rollover” is when you move money from one retirement savings account to another.  For example, if you have a 401(k) at a previous employer and want to consolidate it into your 401(k) at your current employer, you can rollover the balance from the old plan into the new plan.  Alternatively, you can roll it into an Individual Retirement Account (“IRA”), which is a retirement account you open outside of your employer.

Financial advisors usually recommend you rollover money from your 401(k) or 403(b) into an IRA.  But are there times when you’d be better off leaving the money in your old plans???  It depends.   Here are the main factors to consider when contemplating a rollover:

Benefits of doing a rollover:

More investment options – 401(k) and 403(b) plans often limit their investment options to only a couple dozen funds and/or annuities.  IRAs generally allow investment in any stock, bond, mutual fund, exchange-traded fund, annuity, etc.   Some IRAs even allow alternative investments such as real estate and private investments.

• Access to professional advice – In most cases, when working with individual clients, financial advisors cannot directly deduct their fees from 401(k)s or 403(b)s.   Therefore, there usually aren’t ways for advisors to be compensated for working with clients whose money is only in employer plans.  As such, in order to be able to work with most advisors, you normally must roll your employer plans into an IRA, as IRAs do allow advisors to deduct their fees.
• Potentially lower fees – There are costs associated with administering 401(k) and 403(b) plans.   Those costs are passed on to you, the participant, in the form of account maintenance charges or increased fund expense ratios.  In an IRA, there are usually no ongoing account maintenance charges or increased fund expenses.
• Less financial clutter – If you’ve changed jobs a few times, you likely have multiple retirement accounts at your old employers.  This means you have multiple statements, website logins and accounts which will eventually be subject to RMDs.  You can help make your financial life more streamlined by rolling all your accounts into one IRA.
• More withdrawal options – some 401(k)s and 403(b)s limit the type and frequency of withdrawals you can make.   IRAs usually have no such limitations.

Benefits of keeping money in employer plans: 

• Potentially better creditor protection – 401(k)s are covered by federal regulations which protect the plans from bankruptcy and most other lawsuits, including personal injury claims. IRAs and 403(b)s generally have the same bankruptcy protection but may not have the same level of general creditor protection; outside of bankruptcy, the level of protection varies state-by-state.
• Ability to delay RMDs – when money is in your employer plan, RMDs often don’t need to begin if you’re still working, even if you’re older than 70 ½.  With an IRA, RMDs need to start at 70 ½ regardless of your employment status.
• Penalty-free withdrawals start earlier – IRAs typically don’t allow penalty-free withdrawals until age 59 ½.   Many employer plans allow penalty-free withdrawals as early as age 55 if you have since retired or otherwise terminated your employment.