Rolling IRAs price shoppers $45.5 billion in charges, earnings: examine

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IRA transfers are popular among job-switchers, retirees

Investors roll in $516.7 billion from workplace plans into traditional IRAs in 2018, the latest year for which data is available. That’s nearly 28 times more than what was contributed to a traditional IRA that year.

A Pew survey from 2021 shows that 46% of recent retirees have transferred at least some of their workplace retirement funds to an IRA, and 16% of near-retirees plan to do so.

The transition may not be an option: About 15% of 401(k) plans don’t allow workers to keep money in the plan when they retire, according to a survey conducted by the American Council. Co-Sponsor of the American Plan, a trade group.

How Much IRA Fees Can Investors Pay When Transferring

According to Pew research, the typical “hybrid” fund in a 401(k) plan is 0.19 percentage points cheaper than a similar fund for IRA investors. (A hybrid fund holds both stocks and bonds.)

That difference, which may seem insignificant, adds up to large sums over many years.

Using those figures, Pew estimates that investors transferring in 2018 will lose about $980 million in a year due to additional fees. According to the analysis, within 25 years, their total nesting eggs will be reduced by about $45.5 billion due to fees and lost income. That’s just the amount earned in a year.

The typical fee difference in 401(k) plans versus IRAs is even larger for stock and bond funds — 0.34 and 0.31 percentage points, respectively.

Mutual fund sharing classes have different fees

Pew’s analysis looks at fees under “share classes.”

Essentially, the same fund can have multiple classes of stocks that carry different fees, also known as “expense ratios”. They fall into two basic camps: “institutional” stocks, which carry a higher minimum investment and are generally available to employers and other institutions; and “retail” stocks have lower minimums and are generally reserved for individual investors.

Institutional shares typically have lower fees than retail stocks.

Pew’s research assumes a 401(k) saver invests in the institutional version of the mutual fund, while the convertible would be the retail version of the fund. The study estimates how such a transition could impact retirees under different circumstances.

In one example, a 65-year-old woman who retires with $250,000 in her 401(k) will end up with about $20,500 less in savings at age 90 due to higher IRA fund fees, with some certain assumptions – a “significant loss to someone living on a fixed income,” the study said.

Those assumptions include: annual fees of 0.46% and 0.65% in a 401(k) and IRA, respectively; average annual rate of return 5%; and withdraw $1,000 a month to supplement Social Security benefits.

Things to consider before you move into retirement

When you’re deciding whether to leave assets in a retirement plan at work or roll them over into an IRA, there are many factors to consider:

  • Cost. Fees are not always higher for an IRA than for a 401(k). Not all 401(k) plans use cheaper “institutional” stock. Many IRA funds can be cheaper than the funds in your workplace plan. Pew says people looking to move money should look for funds that cost the same or less than the funds they own in a 401(k).
  • Convenience. An IRA can act as a central repository for all or most of your retirement funds, says Scott. People with multiple 401(k) accounts can roll all that money into one IRA, which may be easier for some savers to manage.
  • Flexible. Many 401(k) plans may not allow for as flexible withdrawals as retirees would like. For example, nearly 31% of 401(k) plans do not allow partial or recurring withdrawals in 2020, according to the PCSA survey.
  • Investment options. Overall, savers can benefit from leaving their 401(k) when they leave their employer if they’re happy with their investments, according to the report. But it’s also important to note that your investment options in your 401(k) are limited to the owners and administrators your plan chooses. With an IRA, the menu is much broader. Some retirement investments like annuities are largely not for 401(k) savers either.

“There are certainly a lot of situations where switching would make sense,” says Scott.

“Roll over [itself] not the problem,” he added. It really understands what the fees are. “

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