Your financial plan needs to answer several questions to make the transition into retirement less daunting. Some of the most pressing of these questions are:
Which investments should you choose?
When should you begin making withdrawals?
How much can you comfortably withdraw each month?
Before you can make these decisions, however, you’ll need to decide where to keep your retirement savings.
In many cases, retirees will make the choice between leaving their savings in a 401(k) or rolling it into an Individual Retirement Account [IRA]. Both options preserve the tax advantages of your retirement plan, but what should you consider when choosing between them?
Rolling Retirement Funds into An IRA Can Provide Expanded Investment Options
Employer sponsored retirement plans, like 401(k)s, have features that vary depending on the company sponsoring them, and this includes the available investment options. In fact, research from the Investment Company Institute and BrightScope shows that the average 401(k) plan offers participants just 28 investments. These generally include index and target-date mutual funds and may include other types of investments such as Exchange Traded Funds [ETFs], individual stocks, and bonds.
On the other hand, an IRA is not sponsored by your employer and is not subject to the same limitations for available investments. You are free to choose from thousands of mutual funds from many different sponsors, ETFs, and individual securities. In this way, an IRA grants much greater flexibility to choose the sponsors and investments with a track record of success.
Depending on the options your employer has made available, you may be able to create a balanced portfolio within your 401(k) that meets your investment needs. However, if you are dissatisfied with the investment options within your 401(k), an IRA is a simple solution to access additional investments.
Fees Often Differ Between 401(k)s and IRAs
The cost of your retirement plan is another important factor you’ll need to consider when choosing between a 401(k) and IRA. There are three main types of fees that you will need to compare to determine which account is more cost effective – expense ratios, account fees, and management fees.
Expense Ratios
A mutual fund or ETF’s expense ratio is your share of the annual costs to administer the fund. These costs vary widely based on the type of investment and the share class – in the case of mutual funds – but average 0.37% for bond mutual funds, 0.42% for equity mutual funds, and 0.11% for ETFs. Rather than paying these fees in cash, they are generally subtracted from the fund’s income before returns are passed to you.
Inside a 401(k), you may have access to institutional share class mutual funds, which are generally the lowest cost option and only available to large plans. This means you may pay slightly higher expense ratios for mutual funds within an IRA – since you are investing as an individual rather than part of a large corporate group.
Account Fees
Both 401(k)s and IRAs can have other fees such as trade costs, annual account fees, and added expenses for receiving statements by mail. These vary depending on your account type and the company that holds your account.
Management Fees
Outside of expense ratios and account fees, you can choose to hire a professional financial advisor to manage your IRA. In many cases, this management fee is bundled with ongoing financial planning and billed as a percentage of assets under management.
Financial advisors cannot manage a 401(k) on your behalf in most cases, so you would not have a management expense tied directly to these accounts. However, most people still need a financial advisor for developing and updating a financial plan, recommending investments, and receiving financial guidance.
A Professionally Managed IRA Can Reduce Effort
While investment options and fees are certainly important considerations, the decision between leaving funds in a 401(k) and rolling them into an IRA often comes down to effort. In other words, how much time and energy you need to expend to manage your account.
With a 401(k), you are responsible for choosing investments, rebalancing the account, monitoring investment performance, processing trades, and initiating withdrawals. These tasks are time consuming and become even more complex when you have multiple 401(k) accounts from various employers throughout your career.
Conversely, a rollover to an IRA solves these issues. You can consolidate retirement funds from many different 401(k) plans into a single account managed by a trustworthy advisor. In turn, your advisor can handle investments, trades, rebalancing, monitoring, and processing withdrawals on your behalf.
Additionally, a financial advisor supported by an experienced team can manage your entire financial picture – including Social Security, Medicare, tax minimization, estate planning, and insurance. With these tasks off your plate, you can worry less about your financial situation and focus on enjoying retirement.
Meld Financial Can Help You Determine If a Rollover Is Right for You
At Meld Financial, our experienced team of tax, legal, and investment professionals can evaluate your employer sponsored plan and help you determine if rolling funds into an IRA is an appropriate decision for your situation. We will consider investment options, fees, and the effort required to manage your account before making our recommendations.
Whether you decide to roll your funds into an IRA or leave them in your employer plan, we can help you turn your retirement goals into a reality. Our proprietary wealth management program, Financial Fingerprint®, brings the most important aspects of a successful retirement together into one easy to understand plan. Then, our experienced team supports you throughout every stage of your retirement journey.
Contact a member of our team today to learn more about Financial Fingerprint® or discuss your personal situation.