A Decision You Can’t Affrord to get Wrong


Over the years, I have had employees routinely tell me they took a full distribution from the 401(k) plan upon leaving the company or retiring and rolled it over into an IRA.  My typically reaction was, why?  I tried to say this gently as I did not want to put the person on the defensive. 

Know where it is going
Know where it is going

The most common answer was that they had gone to “someone” who advised them that was the best course of action, as they would have more choices in investments.   Umm, best course of action for whom?   I wonder if the “someone” also told them that he or she made a commission on the deal or is compensated based on the total assets under management or that the fees within the IRA and the funds would likely be higher than within their employer plan.  I am guessing not so much. 

The plan I am talking about has total expenses and I do mean total of 0.18% and through a brokerage window access to several thousand mutual funds, plus three pre-mixed portfolios, seven core funds and target retirement funds, an array well suited to meet just about anyone’s needs. 

I have also had people retire and immediately convert their 401(k) balance into an annuity.  That may not be a bad idea if your 401(k) plan is your sole source of retirement income, but I am referring to people who have a defined benefit pension as well.  Such a move may look good at the start, but that larger total annuity income is still not going to keep up with inflation.  In today’s economy it is hard to tell people to stick with a growth strategy involving the stock market, but that is what has to be done.  One of the biggest mistakes people make is setting their investment horizon at the date of retirement when in fact for many people the 401(k) plan will not be in play as a source of income for several years later. 

Many if not most employers who sponsor a 401(k) plan allow terminated participants to maintain the account at least until age 70 and often for life.  It is good business to allow the account to remain in effect because the higher the assets in the fund the lower the fixed costs are as a percentage of assets. 

It is also good business to communicate the issues and alternatives to employees with regard to plan distributions.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s