Rollover IRAs Cost Consumers $45.5 Billion in Fees and Revenue: Study
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Investors rolled $516.7 billion from corporate plans in traditional IRAs in 2018, the latest year for which data is available. That’s nearly 28 times more money than the contribution to traditional IRAs that year.
Bench investigation from 2021 found 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.
A rollover may not be optional either: About 15% of 401(k) plans do not allow workers to keep funds in the plan when they retire, according to a survey by the Plan Sponsor Council of America, a business group.
The typical “hybrid” fund in a 401(k) plan is 0.19 percentage points cheaper than the same fund available to IRA investors, according to the Pew study. (A hybrid fund holds both stocks and bonds.)
This fee difference, which may seem negligible, is a lot of money over many years.
Using these numbers, Pew estimates that investors who rolled over in 2018 collectively would have lost around $980 million in one year due to additional fees. Over 25 years, their nest egg would be reduced by about $45.5 billion in total due to fees and lost revenue, according to the analysis. That’s just from a single year of rollovers.
The typical fee differential in 401(k) plans versus IRAs is even larger for stock funds and bond funds — 0.34 and 0.31 percentage points, respectively.
Pew’s analysis looks at fees based on mutual fund “share classes.”
Basically, the same fund can have multiple classes of shares that incur different fees, also known as the “expense ratio”. They fall into two basic camps: “institutional” shares, which carry higher investment minimums and are generally available to employers and other institutions; and “retail” stocks which carry lower minimums and are generally aimed at individual investors.
Institutional stocks generally have lower fees than retail stocks.
The Pew study assumes that a 401(k) saver invests in the institutional version of a mutual fund, while a rollover would be to the retail version of the fund. The study estimates how such turnover could impact individual retirees under different circumstances.
In one example, a 65-year-old woman who retires with $250,000 in her 401(k) would end up with about $20,500 less in savings at age 90 due to higher IRA fund fees, considering certain assumptions – a “significant loss for someone living on a fixed income,” the study said.
These assumptions include: annual fees of 0.46% and 0.65% in a 401(k) and an IRA, respectively; an average annual rate of return of 5%; and account withdrawals of $1,000 a month to supplement Social Security benefits.
When deciding whether to leave assets in a workplace retirement plan or transfer them to an IRA, there are many factors to consider:
- Cost. Fees won’t always be higher in an IRA compared to a 401(k) plan. Not all 401(k) plans use cheaper “institutional” stocks. Many IRA funds may be cheaper than your work plan. Those who want to roll should look for funds with equivalent or lower expenses than the funds they had in their 401(k), Pew said.
- Convenience. IRAs can serve as a central repository for all or most of your retirement funds, Scott said. People with multiple 401(k) accounts can transfer all that money into a single IRA, which may be easier to manage for some savers.
- Flexibility. Many 401(k) plans may not offer as much flexibility in withdrawing money as retirees would like either. For example, nearly 31% of 401(k) plans did not allow partial or periodic withdrawals in 2020, according to the PCSA survey.
- Investment opportunities. Overall, savers can benefit from leaving money in their 401(k) when they leave an employer if they are satisfied with their investments, according to the report. But it’s also worth noting that your options for investing in a 401(k) are limited to those your employer and plan administrator have selected. With an IRA, the menu is much broader. Some retirement investments like annuities are also largely unavailable to 401(k) savers.
“There are definitely many situations where a rollover would make sense,” Scott said.
” Reversal [itself] isn’t the issue,” he added. “It’s really about understanding what the fees are.”