If you participate in a 401(k) Plan offered by your employer and you either retire or leave that job you need to be very careful. There are a lot of financial organizations out there that will try to convince you to roll the money from that plan into something more expensive - and you may not even realize it.
There is a big fight going on in Washington now to stop the practice of financial organizations luring 401k roll-over candidates into expensive IRAs. Below is an excerpt from an article related to this looming battle that I found on the Yahoo Finance Web site at this address. Here is the gist of the matter:
"Any day now, the U.S. Department of Labor is expected to finalize new rules that would change the way financial advisors are allowed to give advice to their clients.
The controversial changes are meant to reduce the conflict of interest among broker-dealers and financial advisors who advise consumers on how to invest their savings. And the rules would apply to both major firms like Fidelity and Vanguard as well as smaller independent ones. As it stands, broker-dealers receive commissions based on the products they sell their clients, which critics say creates an inherent conflict of interest. Under the new rules, broker-dealers would be required to act in their clients’ best interest rather than encouraging money moves that directly benefit the broker’s bottom line. The fancy word for this is “fiduciary duty.”
One of the biggest profit centers for broker-dealers is the IRA rollover. Since only a small portion of 401(k) plans allow retirees to set up their accounts for monthly withdrawals in retirement, it’s common for broker dealers to encourage savers to roll their 401(k) into more flexible IRAs. But the risk here is that brokers will direct savers to invest in products that may be too risky and expose them to additional fees.
A White House report found that up to $1.7 trillion of assets held in IRAs are invested in products that financially benefit advisors, creating the potential for a conflict of interest. This conflicted advice costs savers an estimated $17 billion each year in unnecessary fees. (bolding is mine.)
Federal workers have been a hot target for companies looking to convince them to roll their low-cost Thrift Savings Plan funds (the federal equivalent of the 401(k)) into high-fee IRA plans after they retire. Of course, not all broker-dealers are out to take advantage of their clients, but the DOL’s new rules would at least ensure brokers will put their clients’ interest first before fiddling with their nest egg.
An argument posed by opponents is that the new rules will make it less profitable for small and midsize firms to work with people who have smaller portfolios, making it harder for low- and middle-income folks to get the financial guidance they need. There just isn’t enough profit in it for a fee-based advisor earning a flat percentage of a client’s assets when that client only has a few thousand bucks saved up.
Overall, 401(k) savers likely won’t notice too much of a difference under the new rules, as a large number 401(k) plans already have a fiduciary duty to their workers. The rules are largely aimed at protecting 401(k) savers when they prepare to leave their employer and roll over their nest egg into an IRA."
The bottom line is that if you are considering rolling over your 401(k) or other employer supplied retirement plan to an IRA - check the fees very carefully of the plans offered by any financial organizations who you are considering - even those with the most established names. Get fee comparisons from at least three organizations - they shouldn't be any higher than what you are/were paying in your 401(k) plan.
Props to Yahoo Finance for writing this article and keep an eye on what happens here - it''s important. I'll post follow-ups as I see them on this Blog.