At Labor Department hearings this week, consumer advocates,
academics and financial services-industry executives debated proposed
regulations that would, among other things, toughen oversight of professionals
who offer advice on IRA rollovers. Issued by the department in April, the
proposed rule would require the financial advisers and mutual-fund companies
that employees consult about transferring 401(k) money to an IRA to adhere to a
fiduciary standard—or act in the best interest of those they offer advice to.
Currently, some advisers are merely required to recommend
“suitable” investments—a lower standard that, critics say, permits those
advisers to put clients into expensive investments that inflate their own
compensation. Industry representatives counter that the proposal would raise
liability and regulatory costs, which could dissuade firms from serving
investors with smaller balances.
While the Labor Department isn’t expected to issue a final
rule for months, one thing is clear: Investors are flocking to IRAs. Americans
hold $7.6 trillion in IRA assets—versus $6.8 trillion in 401(k)-style accounts.
Moreover, as baby boomers retire, rollovers are forecast to grow from $350
billion last year to more than $540 billion in 2019.
While a rollover can make good sense, it is important to
weigh the following factors.
Fees: More 401(k)
plans offer low-cost investments, including institutional share classes of
mutual funds that are off-limits to individual investors. Indeed, while IRA
investors pay an average of 0.71% for stock funds, 401(k) participants pay
0.54%, according to the Investment Company Institute, a trade group for the
mutual-fund industry. (Others, including the White House Council of Economic
Advisers, contend the gap is likely higher.)
Even seemingly small differences in fees can add up over
time. Before making a rollover decision,
assess your 401(k) fees. Ask your employer for the quarterly fee disclosure
statement that spells out participant fees, including investment-management and
administrative charges. Compare that to the cost of an IRA, including
commissions and account-maintenance and investment-management fees.
Investment Options:
IRAs offer thousands of investment options. But while more choice may be
welcome to sophisticated investors, it can create headaches for those who don’t
know how to evaluate the options.
Simplicity: For
investors having trouble keeping track of multiple retirement accounts, an IRA
offers a way to consolidate assets in one place. By rolling over all of your
tax-deferred retirement assets into one IRA, you can see all of your holdings
on one statement and better manage your overall asset allocation. But if you
like your 401(k), your employer may allow you to do the same thing within the
plan. According to the Plan Sponsor Council of America, 98% of employers accept
rollovers from other company plans—and 66% of those also allow rollovers from
IRAs.
Distributions: If
you are between 55 and 59½ years old when you leave your company, think twice
before rolling over to an IRA. That is because those who leave an employer at
age 55 or older can tap their 401(k) accounts without paying a 10%
early-withdrawal penalty, says Ed Slott, an IRA expert in Rockville Centre,
N.Y. In contrast, with an IRA, the 10% penalty applies before age 59½.
Unlike an IRA, a 401(k) offers the option to take a loan.
Moreover, if you continue working after turning 70½—the age at which tax law
requires investors to start taking required minimum distributions from their
tax-deferred 401(k)s and IRAs—you can postpone taking distributions (and paying
income tax on those distributions) from your current employer’s 401(k) plan.
Creditor Protections:
Federal law protects the assets in 401(k)-style accounts from creditors and
legal judgments. But because IRAs are governed by state law, protections vary.
Tax Breaks: If
you own company stock in your 401(k), check with your tax adviser before
rolling it over to an IRA. By transferring the shares to a taxable account,
those who leave their companies or are 59½ or older can qualify for the net
unrealized appreciation tax break.
Here’s how it works:
Upon transferring the stock, you must pay ordinary income tax on the amount you
paid to purchase it. But when you sell the shares, you will pay the lower
capital-gains tax rate on the appreciation. To qualify, you must empty your
401(k) account in a single calendar year. Transfer the company stock to a
brokerage account and the rest to an IRA.
Click
here to access the full article on The Wall Street Journal.