The Rollover Question Revisited

A little more than two years ago, we opined that for most investors in most circumstances, a cost-conscious IRA rollover would likely be preferable to leaving assets in a former employer's defined-contribution plan. Our primary concerns were (and are) that many 401(k) plans are unnecessarily expensive, feature limited/inferior investment options, and deny participants economies of scale at the individual level.

This morning, we ran across Janet Paskin's SmartMoney piece on the rollover "conundrum." We still lean toward rollovers, but Paskin is absolutely right to point to the mutual fund industry's interest in promoting rollovers. Here's the most interesting passage:

[S]ome companies seem to posit that rolling your balance into an IRA is always the best choice. In fact, they rarely even mention the possibility of keeping your money in your old 401(k). Fidelity's "rollover evaluator" tool, for example, asks four questions, then offers a recommendation--and regardless of the information an investor gives, the answer is always the same: "Roll your 401(k) into a Rollover IRA." (The tool has since been taken off the site "for maintenance," the company says.) Schwab's pros-and-cons grid suggests that there’s little difference between rolling over your balance and leaving it in your employer's plan; T. Rowe Price's Web site highlights the comparison between an IRA and a cash distribution, with little mention of other options.

Now...it's easy to point to others' potential/apparent conflicts of interest. But what about our own? Because we manage assets for individual investors and retirement plan participants, our self-interest in this debate isn't immediately obvious. Though we charge higher fees to investors outside the retirement plan framework (and thus might be inclined to promote the rollover), we have many more clients inside the retirement plan framework, some of whom we will surely lose if/when they elect to roll their assets into IRAs. We have no earthly idea about the probabilities of losing such clients, primarily because that isn't how we think about these things.

When service providers place fiduciary principles at the moral and functional core of their practices, they're more likely to evaluate and present options on the basis of their clients' interests. As well they should.

Is a rollover always and forever the right solution? Of course not. Some retirement plans are wonderfully inexpensive and offer easy access to excellent investment programs. But most don't come close to the fiduciary ideal, which takes us back to our 2007 argument: Generally, plan participants would be well-served by a rollover to a high quality, cost-conscious IRA, either on a self-directed basis or with the guidance of an independent advisor.

Source

Janet Paskin, "The 401(k) Rollover Conundrum," SmartMoney, June 26, 2009