Bad Retirement Advice

I saw an arti­cle about retire­ment plan­ning in the Wall Street Journal yes­ter­day, and it’s a great exam­ple of the poor insight and analy­sis we often use as our main source of “finan­cial edu­ca­tion”.

The title of the arti­cle was an eye catch­ing “Best Retirement Move Almost Nobody Makes” (it was the most pop­u­lar arti­cle on MarketWatch when I went to go find the dig­i­tal ver­sion). It was pop­u­lar, I sus­pect, because we are all afraid of retire­ment finances, and if there’s a “best move” we can make, we want to know about it.

Unfortunately, the arti­cle is just an obvi­ous exam­ple the sort of edu­ca­tion we get from the finan­cial news media. Empty words. We’re caught up with the fear of the sit­u­a­tion, we’re at a dis­ad­van­tage in terms of infor­ma­tion, and we’re inse­cure about our finan­cial futures so they can get our atten­tion with poor­ly writ­ten crap.

Let’s go through this para­graph-by-para­graph, start­ing with the sub­ti­tle:

Experts say more savers should roll plans into their new job’s 401K

Those experts are stu­pid.

I’ve become skep­ti­cal of any finan­cial infor­ma­tion I get from the peo­ple who ben­e­fit from the result. In this case, the results seems too self-serv­ing to the 401K man­age­ment com­pa­nies (who earn a lot of mon­ey man­ag­ing com­pa­ny’s 401K plans). Though skep­ti­cal, at the same time I was curi­ous. What could be bet­ter about a com­pa­ny’s 401K than a reg­u­lar IRA?

With an IRA I can invest in what­ev­er I want. And, I can choose what­ev­er bro­ker­age I want (I choose Fidelity!). With a com­pa­ny’s 401K I’m lim­it­ed to the invest­ment choic­es in the plan, and must use the bro­ker­age they choose. Limited choic­es are OK if there are trade-off ben­e­fits, but in this case I can’t imag­ine what the trade-offs could be.

…Are ignor­ing what may be their best option: Pouring sav­ings into a new employ­er’s 401K.

“…what may be…” Ok, so I’m going to read this arti­cle and expect it to tell me when it may be, and when it may not be.

Of course, I’d be dis­ap­point­ed if that were my expec­ta­tion.

It turns out that…

paper­work has­sles and a hard sell from IRA providers mean investors too fre­quent­ly over­look the lat­ter option.

In my expe­ri­ence, it’s a 1–2 page piece of paper­work to rollover an IRA. And, while a hard sell might be annoy­ing, it does­n’t mean they’re wrong.

Investing pros agree that cash­ing out retire­ment sav­ings is almost nev­er wise.

True, but irrel­e­vant to this con­ver­sa­tion about two options for rolling over a 401K.

But there are ben­e­fits to both of the oth­er alter­na­tives: IRAs typ­i­cal­ly offer a wider range of invest­ment options, while 401(k) plans offer low­er costs, par­tic­u­lar­ly if they are spon­sored by a big employ­er.

It’s not just that IRA’s offer a wider range of invest­ment options, 401K’s offer a very lim­it­ed range of options. Meaning, you don’t even have the same class of choic­es. Want to invest direct­ly in stocks or bonds? Can’t do that in a 401K. And, while often 401K’s offer the abil­i­ty to do some free-form invest­ments, the expens­es are usu­al­ly very high to do so (when com­pared to a typ­i­cal $7.95 online bro­ker­age trade com­mis­sion).

Which gets us to the sec­ond point, 401K’s hav­ing low­er costs. I call bull­shit, but… let’s say it’s pos­si­ble that they can. Basically the dra­mat­ic head­lines should read — rollover into your new employ­er’s 401K if it’s got low­er fees than an IRA.

What makes IRAs so pop­u­lar? One big fac­tor, accord­ing to the GAO report, is aggres­sive indus­try mar­ket­ing, includ­ing sales pitch­es deliv­ered through “edu­ca­tion­al” 401(k) mate­ri­als and mis­in­for­ma­tion deliv­ered by call-cen­ter rep­re­sen­ta­tives.

Or… they could be more pop­u­lar because of the unfet­tered range of invest­ment options, at low­er cost, with bet­ter online bro­ker­age choic­es, and the oppor­tu­ni­ty to con­sol­i­date all non-employ­ee plans into a sin­gle bro­ker­age in order to max­i­mize the ser­vice received.

Or… it could be that peo­ple don’t trust their employ­ers with their retire­ment sav­ings any more than they must.

The report also notes that new employ­ers are some­times indif­fer­ent to pro­cess­ing rollovers because they must con­firm that the mon­ey comes from anoth­er qual­i­fied plan. That means extra paper­work and, in the­o­ry, penal­ties if they foul it up. As a result, experts say savers often get less hand­hold­ing with 401(k) rollovers than they do with the IRA vari­ety, where ven­dors are hun­gry for new cus­tomers.

Certainly, if rolling over into your new employ­er’s 401K offers bet­ter invest­ment choic­es, or low­er costs, by all means go for it. But, if they don’t why would you fight the “we don’t care about your rollover” atti­tude you receive from HR when you can get help from a bro­ker­age hap­py for your busi­ness?

Those hap­py with their old employer’s 401(k) plan typ­i­cal­ly have the option to keep the mon­ey there. But those who want to con­sol­i­date their sav­ings should con­sid­er putting in the extra work to roll the funds into the new employer’s 401(k), accord­ing to Kevin Chisholm, asso­ciate direc­tor at invest­ment indus­try researcher Cerulli Associates. “It will be well worth your time,” he says.

Well worth my time and the extra work? You’ve not proved that to me? What should I look for to know how to make this deci­sion?

IRA’s don’t have invest­ment type lim­its, there are lim­its to what you can invest-in in a 401K. So, since I have low-cost and high­er-cost mutu­al fund options in an IRA, AND have the option to buy stocks/bonds direct­ly, AND can pick the bro­ker­age I want to use… where is there a ben­e­fit to using my new employ­er’s plan? To min­i­mize the sales pitch from the IRA bro­ker­ages?

Going back to the arti­cle’s title, how is this the “best move” for retire­ment?

This is just flat out bad advice, but unfor­tu­nate­ly pret­ty typ­i­cal of peo­ple who play on peo­ple’s fears about retire­ment plan­ning.

Fortunately, over 160 com­menters seems to agree: this arti­cle is crap.

Which makes me won­der, how does this guy have a job? And more impor­tant­ly, who read this arti­cle and thought “Hell yeah! Let’s pub­lish this baby.”

Do your­self a favor and read the com­ments.