These days, most retirement nest eggs are accumulated through employer-sponsored accounts like 401(k)s. Once you retire, you’ll have to decide where to keep those savings — and the decision you make can have a huge impact on your long-term financial security.
If you participate in an employer-sponsored plan, you can keep your savings in your plan, roll them into an Individual Retirement Account (IRA) or cash out the lump sum and pay taxes. Many new retirees choose the IRA rollover route because these tax-advantaged accounts tend to offer more customized advice through advisors, investment choices and distributions options than workplace plans.
While these built-in features can be valuable, a September study found that the drawbacks of IRAs outweigh the advantages for the average retiree. Most people are actually better off keeping their savings in their workplace plan, especially those with lower incomes and less financial experience (that’s most older Americans, according to the American College of Financial Services).
Staying in a well-managed employer plan is often more advantageous for a few reasons, according to Olivia S. Mitchell, a professor at the Wharton School of the University of Pennsylvania and one of the study’s authors. First, employers continue to bear fiduciary responsibility for the assets in their plans even after workers retire. Since the fiduciary is required by law to act in plan participants’ best interest when choosing and managing investments, you get an extra layer of investor protection.
It also means that participants don’t have to choose and manage their own investments, as is the case with an IRA. Most people don’t have the savvy to make the best investment decisions for their retirement security. In fact, a recent study shows that the average retirement saver reaps lower-than-expected returns due to poorly timed buying and selling.
When it comes to advisory, investment management and administrative fees, large companies are typically able to negotiate lower costs and provide access to personalized investments products — like annuities — compared to most IRAs, Mitchell says. In the coming years, changes under the legislative packages known as SECURE 1.0 and 2.0 will expand these benefits, making it even more attractive for recent retirees to stay in their former employer’s plans.
For some retirees, though, rolling workplace plan savings into an IRA is the smartest financial move. You can find out when a rollover IRA makes sense by reading my latest story.
Want to share how you decided to store your retirement savings? Drop me a line at mcags@money.com to tell me your story or ask any burning questions you might have.
— Mary Ellen Cagnassola, Money reporter
