A friend called recently looking for advice about her 401(k). Kate had decided to leave her job to pursue new career options, and money was tight during the transition. Should she roll over her $250,000 nest egg and withdraw some of the funds to help her through the career transition?
An adviser at a brokerage firm was proposing that she close out her 401(k) account and open an IRA that would cost three times as much in annual fees. I explained to Kate (not her real name) that this “adviser” was not acting in her best interest.
The 401(k) cost her 45 basis points annually, while the broker-managed IRA would cost 150 basis points. His proposal would cost her at least $74,000 in fees over the next 20 years, compared with $23,000 in the 401(k) – based on a simple back-of-the-envelope calculation assuming no asset growth. In all likelihood, the total fees would be far higher.
What would she be getting in return for that huge bite from her nest egg? Not much, just a mediocre mix of mutual funds and quarterly rebalancing, with no broader plan for retirement. We left the 401(k) where it is – and adjusted the investment mix to get the costs down further (around 17 basis points). That will cut her 20-year expenses even further, to around $7,400.
This type of predatory marketing underscores why the conflict-of-interest rule unveiled on Wednesday by the U.S. Department of Labor is so badly needed. The rule will impose fiduciary requirements on stockbrokers, requiring that they act in the best interest of clients whenever a tax-advantaged retirement account is involved (taxable retail accounts are not affected directly by the new rule).
The new rule, which will not be fully implemented until the end of next year, will sharply curtail the industry’s pitching to persuade retirement savers to roll over their 401(k) accounts when they switch jobs or retire. Learn more at Reuters Money.