Rollovers

Should I roll my 401(k) into an IRA with my plan provider?

The key problem you could face when you switch to an IRA is higher fees. In many 401(k)s you enjoy especially low costs: In plans with more than $1 billion in assets, expenses average 0.35% of assets a year, according to financial information company BrightScope. For plans with $50 million to $200 million, it’s 0.63% on average. Compare that with retail funds outside of plans, where the average expense ratio is 1.3%, according to Morningstar.

A steep price hike isn’t inevitable, of course. Fidelity Freedom Income Fund, a post-retirement target-date fund, charges 0.49% in an IRA, barely more than the 0.44% you’d pay for the fund within a 401(k). On a $10,000 investment, that’s another $5 a year. Going from Vanguard’s institutional S&P 500 index fund to a retail version only raises your expenses from 0.02% to 0.05%.

Best Moves

Stay put. If you work for a Fortune 500 employer, chances are the investments in your 401(k) are as cheap as anything you could buy elsewhere, or cheaper. When you switch jobs, another option is to move your retirement cash to your new 401(k). Some companies have discouraged rollovers due to onerous paperwork, but in April 2014 the Treasury Department simplified the process.

Ditch loyalty. At a small employer especially, your plan may be loaded with costly annuities or high-fee actively managed funds. In that case you can save by switching to an IRA and investing in index funds. It may seem more convenient to stick with your 401(k) provider, but competitors are equally eager to win your business and can help with a direct rollover. That will let you avoid getting a check in the mail—possibly with income taxes withheld—that you then have to deposit in an IRA.

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