With Super Bowl 50 coming soon and the ads that are sometimes more entertaining than the game, it’s time to think about why IRAs may not be a good idea for everyone, especially 401(k) participants that rollover their accounts. The most popular ads tend to be for beer, cars and IRAs.
Though IRA service providers have done a great job marketing IRAs, especially rollovers from DC (defined contribution) plans like 401(k)s evidenced by the $7.3 trillion in assets, there may be good reasons why employees should leave their money in their DC plans.
Plan advisor Robert Lawton lays out why IRAs are not a good idea for most DC plan participants which include:
- IRA fees tend to be higher never mind the transaction costs.
- There’s a lack of advice especially for smaller account holders.
- Less protection from creditors.
- No stable value funds or fewer capital preservation investments for conservative investors which have decent returns.
- There may not be a fiduciary overseeing the IRA like there is with a DC plan.
- Returns are lower – from 2000-2012, returns on IRAs were 2.1% compared to 3.1% for DC plans according to Boston College’s Center for Retirement Research.
Employers may not want to retain assets of terminated employees in the plan but the more assets they have, the better the deal they get from providers as well as the higher quality of service and good record keepers do the heavy lifting when communicating with separated workers.
In 2013, the GAO conducted a study by calling 30 IRA service providers posing as an employee looking to roll over their DC account into an IRA and found discrepancies and outright lies about the fees and benefits. FINRA has taken notice and has asked their broker dealer members to make sure that the recommendation to roll over a DC account into an IRA is suitable. And the DOL’s conflict of interest rule, the 1st pending DOL reg ever mentioned by a U.S. President in a state of the union address, is designed to bring greater oversight on IRAs.
So should employers care? That’s a personal decision but at least they should be teaching and communicating about the good and bad aspects of IRAs especially with the Super Bowl looming.
