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) while at the same time 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 bank I want. With a company’s 401K I’m limited to the investment choices in the plan, and must use the bank 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 retirements 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.
Let me know what you think