Keeping Retirement Money in your 401(k) Plan Comes at a Price

The Wall Street Journal recently featured an article stating that people were beginning to favor leaving their money in the company 401(k) plan after retirement, rather than roll those funds into a personal IRA. The primary reason mentioned in the article for leaving 401(k) money in the plan was based upon the probable lower institutional fee structure that a 401(k) plan assesses against the various investments offered. But considering fees separate from potential return is absolutely meaningless. Given the very limited choices for investing within a company plan, versus the virtually unlimited choices available within an IRA, whatever savings you may derive in fees on a plan investment is pointless, if, you would rather have your money invested elsewhere, given the choice. Of course, this argument, centered on investment costs and options with retirement money, presupposes that the retiree wants to, or should, continue to go for maximum growth, even when it puts their limited nest egg at risk, rather than tuck their life savings safely away in something with guarantees and a fair, but respectable, return. Another important consideration that was not mentioned in the article is that of spousal rights. A spouse of a 401(k) plan participant has to sign off on withdrawals or rollovers, where an IRA requires no such spousal approval. This difference could be viewed as a plus or a minus, but it is definitely something that should be carefully understood and considered by the client. Also, it is important to check 401(k) plan documents to see if, when you leave your money there after retirement, you reserve the option of freely rolling the money out of the plan in the future. Finally, when you consider the very favorable tax treatment available for passing unused IRAs to both spousal and non-spousal beneficiaries at your death, which allows them to maintain tax deferred growth and “stretch” distributions over their entire lifetime, I see nothing but huge advantages for retirees to continue to move 401(k) money out of their company plan and into a personal IRA as soon as possible. No plan administrator, or company HR person, who only has their limited plan options to offer, will ever be able to give the same level of unbiased, broad based, and professional advice on how to manage retirement money, as an independent broker, financial advisor, or insurance agent.