CHICAGO (Reuters) - John Turner wondered if he should roll over his federal government retirement account into an individual retirement account. So he called 15 IRA providers to get some guidance.
That may sound like overkill, but Turner wasn’t really contemplating a rollover. He was calling IRA providers to test the truthfulness and value of their advice on rollovers from workplace retirement accounts to IRAs.
Turner, who once worked at the U.S. Department of Labor, is director of the Pension Policy Center, an independent think tank in Washington. The calls were research for a paper on what he calls an “extreme case of bad advice.” Eleven of the 15 companies he contacted advised him to roll over his funds from the federal Thrift Savings Plan (TSP), a move that would have cost thousands of dollars in higher fees over 10 years. Four declined to provide specific advice but pushed the idea that rollovers are desirable.
When you retire or change jobs, you can roll over savings from your 401(k) into a traditional or Roth IRA - and that is big business. Nine of 10 new IRA accounts are rollovers, according to the Investment Company Institute (ICI). Households transferred $288 billion from workplace plans to IRAs in 2010, according to the most recent ICI data - but made only $12.8 billion in direct contributions. And the rollover numbers are expected to swell as more boomers retire.
A rollover can make sense if you’re in a 401(k) plan with bad investment choices or high fees, or if you want to take advantage of the tax features of a Roth. But staying in the 401(k) is usually an option, and often a good one. Big plans can negotiate low fees. And 401(k) plans are subject to the fiduciary requirements of the Employee Retirement Income Security Act (ERISA), meaning they must put the interests of account holders first. Not so with IRAs.
With the TSP, the choice is clear. The plan has a simple set of investment choices and ultra-low fees; its average net expense ratio last year was just under three basis points (a basis point is 1/100th of 1 percent). That’s much lower than most 401(k) plans, which had average mutual fund expense ratios of 58 basis points in 2013, according to the ICI. And IRA expenses are 25 to 30 basis points higher than 401(k)s, according to the U.S. Government Accountability Office.
None of that kept the IRA providers from giving Turner a hard sell.
Turner contacted seven mutual fund companies, seven banks and one insurance company. Most of the call center “advisers” didn’t offer fee comparisons and tended to focus on the narrow number of investment choices in the TSP compared with the myriad options available to IRA account holders. One offered Turner a $600 cash incentive to roll his account over, plus 300 free stock trades. Some companies gave him false information - one claimed he could reduce his fees while rolling over; one claimed that Turner had no control over his investments in the TSP.
An ICI spokesperson said mutual fund companies that provide recordkeeping services to workplace plans give participants full information about their options when they separate from the plan - including the option to leave assets in the plan, where that is an option.
“The mutual fund industry supports these efforts and clear disclosure of all fees and expenses in connection with any rollover of assets from a 401(k) plan to an IRA,” the spokesperson said.
Still, the lesson from Turner’s research is clear: When you call an IRA provider about a rollover, you’re getting a sales pitch, not advice. And while you might argue that a Wall Street investment adviser shouldn’t be expected to be knowledgeable about the TSP despite its enormous size (total 2013 assets: $406.9 billion), Turner says some “but not all” of those he spoke with claimed they were familiar with it.
“The best case you can make is that this is a ‘caveat emptor’ situation,” he says. “Most of the companies I called, fees were never considered to be an issue.”
But fees are a big issue. Turner calculates that a $150,000 rollover from the TSP would be 4.4 percent poorer after 10 years if rolled over to an account charging 50 basis points; the loss would be 8.9 percent in an account levying 100 basis points, and 13.2 percent at 150 basis points. (He assumed a 5 percent annual rate of return.)
“This is something that’s difficult for many people to understand,” he says. “Normally if you hear something has a 1 percent fee, that sounds almost like nothing. But it makes a big difference over a long period of time.”
And you should beware the pitfalls of the “investment choice” argument. Often it’s a come-on to get investors into higher-cost actively managed mutual funds or to trade stocks, when most would be better off with a simple menu of low-cost passive mutual funds.
The red flags here are clear. There’s also a lesson if you happen to be in the TSP: Stay right where you are.
For more from Mark Miller, see link.reuters.com/qyk97s
(The opinions expressed here are those of the author, a columnist for Reuters.)
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