What to Know About Rolling Over Retirement Accounts

Americans who are moving money from a workplace retirement plan to an individual retirement account may be tripped up by seemingly modest increases in fees that can significantly erode savings over time, new research has found.

When changing jobs or retiring, people with retirement accounts like 401(k)s often receive marketing from financial companies urging them to “roll over” their balances to individual I.R.A.s. But those I.R.A.s may charge higher fees, according to research from the Pew Charitable Trusts.

That matters because Americans are not saving enough for retirement, said John Scott, director of Pew’s retirement savings project. Paying higher fees over decades hurts savers even more, potentially adding up to tens of thousands of dollars less in savings.

“Seemingly small fee differences can have a big impact on America’s retirement savings,” Mr. Scott said during an online presentation about the research. I.R.A.s hold more than $13 trillion in assets, he said, with the “vast majority” coming from rollovers from employer-sponsored retirement plans.

Investors may pay lower fees for the mutual funds in their workplace plan than they would in an I.R.A. — even if they kept their money invested in the same funds, Pew found. That is because employer plans can negotiate lower fees available to institutional investors, while mutual funds may charge more for shares sold to retail customers to cover costs like marketing.

Pew’s new research identified mutual fund management companies with the most expensive and the least expensive fees, ranked by each company’s average expense ratio for both institutional and retail shares. (The expense ratio is a fund’s annual expenses as a percentage of its holdings.) Using a database at the University of Chicago’s Center for Research in Security Prices, Pew analyzed the fees charged in 2019 for more than 3,800 mutual funds offered by more than 200 companies.

Pew found that mutual funds holding primarily stocks generally charged “significantly” more for retail shares. The median expense ratio was 1.24 percent for retail investors, compared with 0.9 percent for institutions. Although the difference is just 0.34 percentage points, it can translate into thousands of dollars less in savings.

Here is a hypothetical example from Pew: Jim, 26, is leaving his job for a new opportunity. He is unsure how long he will stay at the new job, so he rolls over $30,000 in his 401(k) into an I.R.A. rather than into his new employer’s retirement plan. With no time to do research, he puts the money into the same stock mutual fund he had with his first employer. But the annual fee for the fund in the I.R.A. is 1.24 percent of his assets, compared with 0.9 percent in the 401(k). Over 40 years, the total fees paid in the I.R.A. would shave his retirement savings by almost $65,000 (assuming no new contributions and annual returns of 8 percent).

Of course, not all funds in workplace plans have lower fees than those in I.R.A.s, Mr. Scott said. Some plans may have limited options and higher fees. But investors may lose savings, the report said, if they are unable to interpret fee information in often “opaque” investment disclosures.

Employees should carefully consider the options for their retirement savings when leaving a job, including leaving it in the old employer’s plan. The fees in that plan may be lower, but you would have to compare. (Some employers will not let you leave your money behind if the balance is small.)

Here are some questions and answers about rolling over retirement balances:

How can I compare fees for different mutual funds?

Typically, you can find a fund’s expense ratio, often labeled “total annual fund operating expenses,” on its management company’s website or in the fund’s prospectus.

The Financial Industry Regulatory Authority, a private group that regulates brokerage firms, offers an online fund analyzer that lets you compare information about different funds, including expenses.

Administrators of 401(k) plans are required to disclose fund fees, but research from the Government Accountability Office suggests many participants have difficulty using the information.

What if my financial adviser recommends rolling my 401(k) over to an I.R.A.?

Ask for the reasoning behind the advice, because advisers may earn fees from managing your money in an I.R.A. As of July 1, advisers must provide written documentation explaining why a recommended rollover is in your best interest, said Nevin E. Adams, a spokesman for the American Retirement Association, an industry group. The mandate is part of rules recently adopted by the Department of Labor.

Are there any drawbacks to keeping my retirement money at a former employer?

You cannot contribute to a former employer’s 401(k) plan, said Heather Winston, director of financial planning and advice at Principal Financial Group. So if you leave it behind, you should contribute to a new account to keep your retirement savings on track. Sticking to an employer plan means you are limited to the company’s menu of investments, she said, while an I.R.A. may offer more options.

Also, it can be challenging to keep track of multiple accounts if you change jobs several times, said Michael J. Garry, founder and chief executive of Yardley Wealth Management. Consolidating them in an I.R.A. can make it easier to make sure funds are correctly allocated among different types of investments.