Tuesday, April 16, 2013

Fun with the 401k Rollover

I read an article today via the Wall Street Journal.  It was entitled "Best retirement move almost nobody makes."  The sub-title went on to say, "Experts say more savers should roll plans into their new job's 401k."  Here is a link to the entire article:


In the article, the author makes some claims that I found suspect.  Here are a few of them:

"New research from Congress’s investigative arm, the Government Accountability Office, suggests that paperwork hassles and a hard sell from IRA providers mean investors too frequently overlook the latter option (roll from 401k into another employer 401k)."

"Investing pros agree that cashing out retirement savings is almost never wise. 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.
Those cost savings can be significant in the long run."
"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."
"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."
I question just about everything in the article, so a I wrote a note to Mr. Ian Salisbury, the writer at MarketWatch, and author.  His response with my original note is reprinted here:
Mr. (Chumpmenudo):

The article was based, in part, on a recent report by the Government Accountability Office. I think you will find the answers you are looking for inside.

I am glad that you are happy with your Vanguard IRA. However, retirement experts I've talked to do not rate access to MLPs high on the list of priorities for most retirement savers.


Ian Salisbury
Staff Writer
The Wall Street Journal Digital Network
1211 Avenue of the Americas
6th Floor
New York, NY 10036

p 212-416-2241
f 212-416-2027

Date: Tue, 16 Apr 2013 18:42:44 +0000
Subject: Rolling 401k into another?

Why on earth would you advocate this?  Very irresponsible.  Who are these "vendors" you reference in this article hard selling us to roll into an IRA?  Investment options for an IRA are LIMITLESS.  I own stocks, funds, ETFs, MLPs, CEPs, and REITs.  My evil "vendor" is Vanguard, where I'm charged $2.00 per stock trade, and my weighted average expense ratio is below 0.25%.

What a terrible article.



Now admittedly, I was a bit rude with my note, and I regret it a little, but I really did think the article is pretty irresponsible.  Especially after going to the GAO link he provided.  It turns out the government commissioned a study to find out why 9 out of 10 people roll their 401k money into a self directed IRA vs. into their next employer's 401k.  The Department of Labor and the IRS did the investigation, and surprise surprise, the reason is NOT that a self directed IRA with low expenses and limitless options is preferable to investors, it's that shady (my word) "vendors" are crossing some line and having unfair influence on the decision, and that more needs to be done by employers and plan administrators to educate we ignorant investors! (my words again ;-))

Just a thought;  could it be that investors are actually pretty smart, and that the data in the study shows that we choose to manage our own money in a self directed IRA vs. an expensive and restrictive 401k by a margin of 9 to 1?  Amazing.

Here is what I wrote back to Mr. Salisbury (very civil I thought):

Dear Mr. Salisbury.

Thank you for the link;  I read the report summary, and several pages of
the actual document.  Might I suggest a better title for an article based
on this report?

"When leaving a company, what should you do with your 401k?   You have
four options."

Then write a useful piece with some actual actionable information.  Do
your homework.  I think you'll find the best, lowest cost option for 98%
of all employees is to indeed roll their money out of the high
expense/limited choice 401k plan, and into a low cost/infinitely flexible
self directed IRA.

Why don't you compare the average plan cost for the two options?  Why
don't you investigate the sheer number of options available for the two
differing routes.  It isn't difficult, I've done this twice for my wife
and me.

And yes you are correct, MLPs aren't always smart in an IRA, and require
that I file a K1 with my tax return.  I own most in my taxable account,
but the point is, I have access to them if I choose, and you don't know my
personal financial situation do you?  (One of the points you use to argue
against IRA rollover advice).

And here's an idea for another article.  How much did this study cost tax
payers, and why was it commissioned?  If you think about the
premise/objective, it's ridiculous.  The government is paying to study why
the IRS and Department of Labor make it so damn difficult and confusing to
plan for retirement.  Give me a break.  And their recommendation is burden
employers and plan administrators with more regulations requiring
additional education around different options?

How about scrapping the whole 401k system in favor of employee directed
and controlled IRAs with the same contribution and match rules 401k plans
enjoy? Then let the financial world compete for our retirement dollars.
That would be a great article, I hope you write it.




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