If you have an old 403(b) from a past employer, it's important to be aware of ALL the options you have for it and understand that you are a prime target for financial advisors who can't wait to get their hands on that hard earned savings when they find out it exists. They love to feed off 401(k) and 403(b) rollovers because many charge fees based on the dollar amounts they manage for you. So for example, if you rollover $300,000 to an IRA for them to manage and they charge a 1% AUM fee (assets under management) which is not out of the ordinary, they would then be collecting an additional $3,000 a year in fees from that rollover.
For advisors with this business model, rollovers are a large source of revenue and therefore present a conflict of interest when they are advising you on whether or not to rollover. Many advisory firms won't work with you if you keep your money in your 401(k) and don't move any to them. So they have an extremely strong financial incentive for you to rollover. Below are 5 common excuses advisors make when trying to sell you on a rollover. It's important to be aware of these so you can make the decision that is in your own best interest and not theirs.
1) "You will have more investment options". When they tell you this you have to ask yourself the following question. "Why should I care?" More choices doesn't automatically mean they will generate you a higher rate of return. It certainly doesn't mean they will be less expensive. In fact, a lot of 403(b) plans offer what's called institutionally priced funds. Basically this means you are getting a group discount on the expense of owning that fund as compared to owning the same exact fund in an IRA. And it is absolutely possible for you or any financial advisor to build a sufficiently diversified portfolio without having to have access to a thousand options. If you do happen to be a self directed investor who enjoys more flexibility, many 403(b) plans offer an expanded window of investment choices. This window is called different things at different companies. At Fidelity Investments it's called the Self-Directed Brokerage link.
2. "You should rollover so we can manage it better for you". I have heard this over and over again. But what does "manage it better" even mean? Are they telling you they can consistently generate higher returns than the market indexes over the long run? The majority of studies on active investing prove that is highly unlikely. In this scenario, the adviser may talk about their investment process and how they know which sectors of the market you should be overweight or underweight in at any given time. It's important not to fall for this pitch. You can't directly control investment performance. You are better off focusing on what you can directly control: maintaining a disciplined investment strategy, and investment costs.
3. "We can take over the day to day management of your portfolio since you don't have time". While it is true that if you don't have the time to regularly rebalance your portfolio so that it maintains an appropriate level of risk based on your goals, you should consider some help with automating that process. However, what that advisor most likely either doesn't know or doesn't bother to tell you is that nowadays, automated rebalancing is a feature that may already be available to you inside of your 401(k) or 403(b). And it very likely comes at a fraction of the cost that the advisor would charge if you rollover to their IRA. You should always consult your service provider to ask if they offer any kind of automatic rebalancing feature or professional management and find out what it costs, if anything. I have seen some 401(k) and 403(b) plans through Fidelity Investments that offer an automatic rebalancing feature at no cost.
4. "We can help you protect your money better". - This one is a favorite of insurance salesmen and brokers disguised as financial advisers. They like to offer a promise of guaranteed returns without the possibility of losing money if you roll your money to them and purchase an annuity inside of that IRA. Of course that sounds nice in theory, but the reality is those annuities can be loaded withed with higher fees, restrict your ability to access your money, and are incredibly complex and difficult for the average investor to truly understand what they are getting into.
It is important to have the option to protect a portion of your investments based on your situation, but that can usually be done without rolling your money to an IRA. By law, your 403(b) or 401(k) has to offer enough varied investment choices to allow you to be diversified. This means not only making riskier stock-based options available, but also more conservative bond and cash-like options that typically experience less volatility than stocks. Your employer savings plan may even offer something called a Stable Value fund or GIC (guaranteed investment contract). These types of investments do not exist in the IRA world and they historically do not lose principal value while providing an interest rate that is usually more competitive than IRA options with similar levels of risk. On top of that they have much lower fees than annuities.
5. "What happens if your old employer goes bankrupt?" - I have seen "advisors" try to scare people into rolling over by asking this question. Here's the deal. If you have money in an old 401(k) with an employer and that company ends up announcing that they are filing for bankruptcy, that does not mean your money is all of a sudden going to just disappear. I have encountered this situation many times and how it plays out is you will be given multiple notifications that at a date in the future the plan is closing. Usually this date is three months or longer. You then have until that declared plan closing date to go ahead and roll your money somewhere else, be it your active employer sponsored retirement account or an IRA. As long as you do this, you will keep your vested balance and it will not be taxable. So the whole bankruptcy thing is actually not the big deal that advisor may make it out to be.
The key takeaway here is that if you have an inactive 401(k) or 403(b), you need to be fully aware of ALL of that plan's features in order to be able to make the best decision for yourself when deciding what to do with it. Depending on your account's features and your own needs, the rollover IRA could still make sense. It could also make sense to leave the money in the plan or roll it over to your new 401(k) or 403(b). If you have done the research in comparing the options you will minimize the chances of regretting your decision.
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