I just read a very disturbing piece on 401(k) rollovers Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers via Bloomberg. The piece described some of the tactics used by brokers to entice retirees from a number of major corporations into rolling over their 401(k) balances to an IRA with their firms. It seems that often these IRA accounts included costly, high risk investments that enriched the brokers and their firms. My hope is that this piece will make you scared and angry. Moreover I hope it will motivate you to be careful when choosing an advisor for your retirement nest egg.
There is nothing wrong with doing a 401(k) rollover, however you need to understand how your retirement money will be invested and moreover if the strategy proposed makes sense for you. Here are a few thoughts on 401(k) rollovers for you to consider.
Understand your 401(k) rollover options
Upon leaving your employer due to retirement or any other reason you have several options with regard to your old 401(k) plan:
- You can leave your account in the plan.
- You can roll your balance over to a new employer’s plan if allowed and if applicable.
- You can roll your balance over to an IRA.
- You can take a distribution in cash. This is likely the least desirable as it will trigger taxes and in some cases penalties.
Additionally if you have a pension you may have the option to take your benefit as a lump-sum and roll it over to an IRA.
Beware of cold call solicitations
As described in the Bloomberg piece there were a number of brokers who targeted retirees of large corporations and in many cases convinced them to roll their retirement plan balances over to high cost, high risk investments. The brokers profited, in many cases the retirees did not. Many of these retirees would have been better off leaving their balances in their former employer’s 401(k) plan but were advised differently by these brokers.
It makes sense for advisors to focus on the retirees of a given company. The advisor can focus on understanding the organization’s benefits and can potentially be a real asset to retirees seeking advice on what to do next.
However these retirees need to vet these advisors. Is he a full-service advisor who can help with your entire retirement situation or is she just looking to roll your money into products her firm sells? A few other questions:
- What services does the advisor offer?
- How is the advisor compensated? Fees? Commissions? What are his conflicts of interest in terms of the advice he can render and in terms of any products he might recommend to you?
- Does the advisor work with retirees and near retirees or others with a situation similar to yours?
In an ideal world you are already working with a trusted advisor who has been providing advice on your 401(k), all of your other investments, as well as your retirement and financial planning needs. This trusted advisor will likely be your best source of advice when deciding how to handle your 401(k) balance at retirement.
Just because you receive a solicitation from someone saying they work with retirees from your company doesn’t mean this person is the right advisor for you and your unique situation. That said there are a number of excellent and reputable advisors who focus a portion of their practice on working with employees of certain companies. Like anything else do your homework. You can check their background at several places:
- BrightScope
- FINRA’s Broker Check
- CFP Board (if they are a CFP)
- Additionally check out this excellent guide to finding an advisor from NAPFA
Understand how your money will be invested
As a commercial for a well-known brokerage firm said back in the day, “… money doesn’t come with instructions…” How true. None the less if the broker who is actively soliciting your rollover business suggests financial products such as these ask many questions:
- Non-traded REITS
- Indexed Annuities
- High cost Variable Annuities
- Exotic high cost bonds
- Proprietary mutual funds from her employer
- Private investments such as oil and gas partnerships
This is hardly an exhaustive list. I’m not saying that there are not varieties of these and other similar vehicles that may be appropriate for you. However if you don’t understand what the broker is proposing, why it is a good alternative for you, ALL of the risks, how liquid your money is if needed, any sales or surrender charges, and what fees and commissions the broker earns you are setting yourself up for potential disappointment.
Retirement should be a great time of your life. Please don’t blow your nest egg by choosing the wrong financial advisor for your 401(k) rollover.
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I fell victim to a shark who rolled my 401k and lump sum buyout into a Pacific Life variable annuity. I got out as soon as surrender charge was done, put what was left in Fidelity. Watch out, can you believe there’s people that call themselves advisors but are only concerned with lining there own pockets.
William thanks for your comment and sorry to hear about what happened to you. Sadly I have seen what your describe all too many times.
Great breakdown Roger! I actually read the same piece and am in the middle of writing my own post on it so great minds must think alike. 😉 That said, I spoke with far too many investors in my day who fell prey to shady “reps” who sold them a bill of goods only to put them into something they had no business being in all the while the rep was making nice commissions. Unfortunately that just muddies the waters for many others thinking that all advisors can’t be trusted or that they shouldn’t do a rollover. As with anything else investment related, this is just proof again of why it’s so important to do your due diligence so you do what is best for you and your situation.
John thanks for the comment and I’m not at all surprised that you were inspired to write post by this article. Disturbing to say the least. I’m looking forward to reading your piece.
I’m glad to see articles like the Bloomberg piece mentioned here. I saw that article as well and shared it on social media. The kind of practices mentioned in that article are exactly why I have an investment education website.
But I didn’t like how the article failed to mention the many good options that are out there for DIY investors. It also failed to mention that if people will just take some time to educate themselves about investments, IRAs can in fact be a very good thing. If your 401k has only mutual fund options with an average expense ratio of say 1%, then you would do extremely well to develop an asset allocation plan, open up an IRA with Vanguard and invest your money commission free into ETFs with average ongoing fees of .10% or so. That’s why I had such a problem with this comment:
“You’re going into the wild, wild west when you take your money out of a 401(k) and put it into an IRA,”
That all depends.
I think the worst part was this quote:
“If someone offers you $600 to roll over your IRA, you can be sure you are going to be paying a lot more additional expenses later,”
That’s complete nonsense. You can be sure that the AVERAGE rollover customer ends up spending more than $600. But you can also be sure that you have control over the expenses you pay out. I recently did this exact deal for my mother, and she got the free money. She’s investing only in low cost ETFs and individual stocks with a long term buy and hold strategy. There are no ongoing fees from the brokerage account. Would they like to make more money from her? Sure. Just about every time we talk to them, they start in on a mutual fund sales pitch. We politely decline any advice, and that’s that. You are in control of an IRA. That’s true even when you give up that control voluntarily to an advisor. Every single day, you’re making the decision to give up that control. With a 401k, the company has made most of the decisions for you.
Does that protect completely ignorant people? Yes, it does. My answer to that problem is a little more idealistic: Don’t stay ignorant. Educate yourself.
Chris thanks for your comment and I will be sure to check out your site. As for the Bloomberg piece while there may be a few parts of the article you might disagree with on balance I thought it was a good piece exposing a huge problem in this arena. You should try to contact the author directly with your concerns.
There certainly are many great options for DIY investors, but unfortunately many folks at this stage do not have the knowledge or confidence to make the right moves. Like anything in this arena investors are wise to learn as much as they can before making any moves with their retirement accounts whether on their own or via an advisor.
Thank you for responding. I did go ahead and comment on the Bloomberg page as well. I don’t know if it will pass their “moderation” or not. My point is that the author did some good work in investigating these kinds of egregious practices. But then he used that information to scare investors into leaving their money in a 401k. Leaving money in a 401k is certainly better than what the investors highlighted in this story did. But I can make anything seem good when I compare it only to things that are worse. There are plenty of good options for investors who wish to take control of their investments, none of which were discussed in the article. That’s all I’m saying. Maybe the author will do a good follow up to this piece.
While I can see your points, overall the message of advising retirees with 401(k) balances to wary of the abusive practices described trumps (in my opinion) the valid concerns you raise.
After thinking about it more, I do agree that the overall message trumps the concerns I raised. That’s because educated investors already know the things I mentioned, or will go about finding them out. It’s only the uneducated (and maybe overly trusting) investors that need to read this article and realize the dangers that are out there. You had some sound warnings and advice in your post as well. I will try to take a look at more of your stuff when I have time. This was my first time coming across your site, that I recall. Have a great weekend!
The key take away for me is to avoid brokers / broker-dealer firms at all cost and consult with a fee-only Registered Investment Advisory firm because an RIA legally has fiduciary duty to its clients to do what is in the best interest of the client and it cannot sell any investment products to its clients either. This is the best set up for both the client and the advisor.
Full disclosure I own and am President of an RIA registered in Illinois. I advise those with 401(k)s to roll over their balance into an IRA so that they can control their investment options and do so as cheaply as possible (my wife’s 401(k) for example has only terrible investment options – every fund is actively managed with at least a 100bps expense ratio, the only other option besides leaving it in cash is an S&P 500 index fund that charges a high 60bps).
I then tell these people I can manage their IRA for them; they can pay me, the advisor who knows more than them, to manage it or they can do it very cheaply on their own. From there, it’s their decision how to proceed.
Thanks for the comment Mike. Hard to disagree with anything you said. Your wife’s plan sounds like a real stinker.
First of all, I forgot to mention in my original comment great article.
Yep, her 401(k) is terrible. I’m in the process of putting together a proposal for her company to transfer their plan over to Vanguard and to utilize Vanguard’s low cost index funds. The bottom line is it saves everybody money, so wish me luck.
While I agree with much of the assertions in this article I feel like it’s describing a small subset of the financial service industry. Not all advisors are predators! This type of reporting will scare many retirees into paralysis and doesn’t report both side of the story. I hate to say this but an investor who is taken advantage of this way has nobody to blame but himself. Where is the movement about predatory sales practices in the car dealerships? How about lawyers? By the way, BD’s have fiduciaries that work on a fee for service basis for 401(k) plans.
Mario thanks for your comment. While I agree with much of what you said, especially the part that all advisors are not predators, I can’t remotely buy “I hate to say this but an investor who is taken advantage of this way has nobody to blame but himself.” Not in any way shape of form. That’s akin to saying the elderly are to blame for those who financially abuse them or children who are sexually abused by adults are at fault. Many investors do not have a clue about their finances and sadly put their trust in the wrong person, but they certainly do not deserve to be victimized!!!