To Roll or Not to Roll, That is The Question!

To Roll or Not to Roll, That is The Question!

| November 01, 2018
Share |

One of the more common questions or occurrences we hear in meeting with clients is how previous retirement plan [401(k), 403 (b), profit-sharing, cash-balance pensions, deferred compensation, etc.] balances have been dealt with.  For many, the “solution” to effectively manage these assets is to do nothing.  As I recently wrote, doing nothing may be the WORST decision one may make.  For most of our lives we have worked to enjoy a lifestyle and to build savings and investments.  When the time comes for us to retire it is imperative that we have positioned our savings and investments to begin to work for us.

The fact that previous retirement plan funds have not been considered and managed effectively until the realization that retirement is forthcoming is a tragic mistake.  This omission has an incredibly negative effect on one’s ability to successfully retire. Let’s consider the pros and cons of how best to deal with these funds for the sake of a successful retirement.  In particular, what are the key differences between maintaining assets in a previous retirement plan vs. rolling these funds into a rollover IRA?

To me, the 2 biggest reasons to maintain funds in a retirement plan are either:

       1) The need to borrow against these funds, (loans are permitted against many retirement plan assets, most notably 401(k) plans).


       2) The need for ERISA protection against creditors, lawsuits, etc. ERISA acts as a shield for retirement plans against creditors and lawsuits.

However in the case of IRA’s, they are generally protected against bankruptcy, but state laws vary with respect to other types of claims.  In the case of Pennsylvania, state laws are considered to be extraordinarily strong and therefore there is still a high level of protection if rolling funds to an IRA.

I am NOT advocating NOT participating in a current retirement plan which allows for payroll deduction and, in many cases, a matching component from the employer but I am suggesting you consider the merits of rolling existing funds when able or previous plan funds over to an IRA for the following reasons.

The biggest reasons to roll funds from a previous retirement plan into a rollover IRA are costs and access.  While many plans have access to “institutional” class of mutual funds for lower expense ratios, the “universe” of choices still tends to be ONLY mutual funds.  There are also additional expenses related to administration, platform and advisory fees.

Outside of mutual funds in a rollover IRA, one may use individual stocks, Exchange-Traded Funds (ETF’s) individual bonds, CD’s and more exotic holdings such as real estate investments and options.  The expense ratios for these investments may be 0 or negligible and in the case of individual bonds or CD’s you may have predictable outcomes that you can plan for events such as timing a maturity for when you are required to take your first distribution

In addition, don’t discount the value of professional advice.  A qualified advisor, preferably a fiduciary who is required to act in the best interests of clients, may add tremendous value through expertise, knowledge and analytic tools and access to products that offer a highly-customized plan for the benefit of the client.  Additionally, the ability to offer more sophistication through beneficiary designations inherent in effective estate planning may save a tremendous amount of money in taxes as well as sheltering assets for the sake of beneficiaries. 

Contrast the above merits of rolling funds over to an IRA vs. a retirement plan with a limited choice of funds which are generally subject to market risk with no predictability in value, the lack of customization  and the inability to effectively create an estate plan.  One may also see that the ability to roll retirement plan funds into an IRA may promote lower costs, a broader level of diversification and predictability of outcomes that one can’t replicate within a retirement plan, along with customized investment strategies and personalized estate planning considerations. 

While many think that this decision is a fairly even comparison, to me it is like comparing “apples and oranges”, if you don’t have the same investment “universe” or the same level of control for defined outcomes, there is no comparison.  It is simply a matter of being educated about the glaring differences and in making an informed decision that best suits your needs and objectives. 


Have a question about this topic? Contact us today. 

Our team at RZ Wealth is committed to helping clients prioritize and understand their needs to best guide them with insightful wealth management including financial, education, retirement and estate planning.


Share |