Changing Jobs? Be Aware of These 401(k) Rollover Pitfalls!
Not all IRA products are in your best interest.
April 03, 2017 by
Ric Edelman
When you leave an employer, whether it's to take another job
or to retire, what should you do with the money in your retirement account at your
old job?
The right answer for you depends on your circumstances. For
some, leaving the funds in your current account may make the most sense, while
others may want to move their money into their new employer’s retirement plan.
You may also consider rolling your funds into an IRA, a
simple process that may give you a wider range of investment options.
Or you may want the funds sent to you in the form of a check
— though you will be responsible for paying taxes and a 10 percent penalty if
you withdraw the funds before turning age 59 ½.
We recommend you talk with an Edelman Financial Engines Planner for independent advice on which option is
right for you.
While you are considering your options, be cautious if an aggressive
marketer approaches you with IRA products — even if the marketer is one of the
biggest and best-known service providers.
Many providers offer “misleading” and “biased” information
about their products and steer participants into products that may not always
be in their best interest, a
GAO study found.
For example, seven of the 30 largest 401(k) service
providers told a government investigator who contacted their call centers that
their IRAs were "free," but didn't reveal that investment,
transaction and other fees apply. Five of the 10 IRA websites that GAO examined
made similar claims.
GAO also found that:
- Participants think they have received investment
advice from their service providers that is solely in the participants’ best
interest even though they may not actually be receiving such advice.
- Service providers use their websites and call
centers, including making outbound calls to plan participants, as a means of
marketing their firms’ retail IRA products and steering participants into them.
- In addition to marketing their products, service
providers may offer their call center representatives financial or other
incentives for asset retention when participants leave their assets in the plan
or roll them over into an IRA at the firm.
GAO, the investigative arm of Congress, urged that service
providers be required to clearly disclose their financial interests in
participants' decisions.
So instead of simply talking to the service provider of your
former employer’s 401(k) account about rolling it into an IRA, talk with an Edelman Financial Engines Planner. You will receive objective, independent
advice, and any investments we recommend will be chosen because they fit your
needs — not because they generate us a commission.
Note: When considering
to roll your old retirement plan at work into an IRA, consider these factors:
- The available
investment options for diversification.
- Any costs
and account-related fees and expenses.
- The
account’s service-level availability.
- Whether
the account offers penalty-free withdrawals between ages 55 and 59 ½.
- Whether
loans are permitted within the account.
- Whether
there is legal protection from creditors under federal law.
- The amount
of the required minimum distribution (RMD) once you reach age 70 ½.
- Any
factors relating to employer stock.
- Any state
tax considerations.
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