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.

NEW SERVICE – Do you have questions about retirement or your rollover options? Schedule a coaching call with me to discuss your options.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

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