1. Thousands of Investment Choices, (literally thousands more)
A huge advantage of rolling over a 401(k) into an IRA is the expanded range of investment options. While most 401(k) plans offer a limited menu of funds (typically under 30), an IRA opens up access to literally thousands of investments, which includes individual stocks, bonds, ETFs, options, mutual funds, and alternative assets. This gives you more control over tailoring your portfolio to your investment goals, risk tolerance, and financial goals.
2. Lower Fees and Better Cost Control, (substantially lower fees)
IRAs are far less expensive. 401k plans have (often hidden) administrative fees and higher expense ratios on the available funds within the plan. I’ve seen plans where the all-in fees are north of 2% annually. Why? Well, 401k plans incur expenses running the plan for the company you worked for, expenses like the Third Party-Administrator (they handle reporting, tax filing, legal testing requirements, etc.), the plan advisor (picks and manages the investment options), and the record keeper (handles the trades, record keeping, and statement generation). All of these groups charge for their services, which comes out of your 401k returns. With an IRA, these pieces can be eliminated, so you can actively seek out low-cost options which can translate into significant savings over time.
3. Consolidation and Simplified Management
Many investors accumulate multiple retirement accounts over their careers, which can make managing your overall retirement strategy complicated. Rolling over your old 401(k)’s into one IRA allows you to consolidate your retirement assets in one place, making it easier to manage and adjust as needed. In addition, the ability to make changes to your holdings is vastly easier within an IRA.
4. Greater Flexibility for Beneficiaries and Estate Planning
IRAs offer more flexibility when it comes to naming beneficiaries and structuring how those assets will be passed on to heirs. Many 401(k) plans have strict rules regarding spousal inheritance or limited options for non-spouse beneficiaries. With an IRA, you have more control over how your assets are distributed, giving you the ability to create a more comprehensive estate plan.
-Paul R. Rossi, CFA
P.S. What does the picture of the world’s fastest plane (SR-71) have to do with rolling your 401k into an IRA? Nothing, I just like the picture. My family, not too long ago, attended a special presentation by a former SR-71 pilot who described what it was like being a part of this plane’s storied past during the cold war.