Most investors don’t think there is much difference between 401 (k) and individual retirement (IRA) accounts.
But before you rollover your 401 (k) account into an IRA account you need to know that there are huge differences. And if you already have an IRA account you need to supervise it closely and maybe consider making some changes.
The major difference is that employers manage 401 (k) plans but IRAs are held in broker accounts.
Employers are required to act in the best interest of their workers. Brokers have conflicts of interest as they are under pressure to convince you to invest in financial instruments that make their firms the most amount in fees.
“IRAs, where 401(k) assets unfortunately end up, have as high if not even higher fees on average,” Mercer Bullard, a law professor at the University of Mississippi School of Law and longtime critic of the fund industry, told CNBC News.
“The Center for Retirement Research said in a report this year that the biggest difference between 401(k)s and IRAs is the relative lack of investor protection in the IRA structure. Regulators have contended that part of the explanation for the high fees on IRA investments is that most IRA assets are with broker-dealers, and the incentive payment arrangements typical in retail mutual funds—namely, 12b-1 distribution fees—encourage the sale of higher-fee mutual funds. The U.S. Government Accountability Office conducted a study this year that concluded the rollover market is, in the least, confusing to retirement plan participants, if not outright misleading,” CNBC reported.
While 401 (k) administrators are required by federal laws to disclose fees, don’t look for all brokerage houses to disclose all their fees. Or the fees may be buried in small print.
The reason that IRAs are not as closely supervised according to Francis Vitagliano, research consultant at Boston College’s Center for Retirement Research, is because it was assumed that most retirement funds would not end up in IRA accounts.
“The market has focused on the growth of 401(k)s and the fees, but what has been kind of overlooked is the IRA rollover market,” Vitagliano told CNBC. “The same light shined on 401(k) assets and fees should be directed at rollover IRAs.”
This issue has been given little attention until the federal Financial Industry Regulatory Authority in July published a notice warning brokerage houses to stop deceiving investors.
And it is important because more retirement savings are in IRAs than 401 (k) accounts. IRAs have an estimated $5.4 trillion in assets, compared to $4.1 trillion.
IRA accounts will grow for at least the next 10 years as baby boomers retire and move their 401 (k) assets into IRA accounts.
“FINRA has observed overly broad language in sales material of broker-dealer firms that implies there are no fees charged to investors who have accounts with the firms,” the FINRA notice says.
“In other instances, specific fees that are not charged are highlighted and separated from disclosure regarding other fees that may be charged. This kind of sales material may mislead investors regarding the cost of opening, maintaining or closing an account.”
So what can investors do when they leave their jobs to either retire or get new jobs and can’t keep their 401 (k) accounts?
One option is to place your retirement savings into low fee brokerage firms such as Vanguard Group or E-Trade and hire a financial planner to pick mutual funds, individual stocks or exchange traded funds (ETF) for your account.
I would suggest that the financial planner be paid a fee for evaluating your complete financial picture. Stay away from financial planners who receive commissions based on activity in your account.
