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 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.
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“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
http://link.reuters.com/qyk97s
(The opinions expressed here are those of the author, a columnist
for Reuters.)
(Follow us @ReutersMoney or at
http://www.reuters.com/finance/personal-finance. Editing by Douglas
Royalty)
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