Comparing Account Fees Before A 401(K) Rollover To An IRA

Individuals who have funds in a 401(k) retirement plan sometimes choose to transfer some portion of their account into an IRA. After separating from a place of employment, a 401(k) participant might prefer the additional investment options available in an IRA. Individuals who are planning to transfer funds from a 401(k) to an IRA should compare the fees of both accounts before requesting a rollover.

Even if you expect no specific charge for transferring funds from a 401(k) account to an IRA, each plan likely has an ongoing fee structure. Someone has to be paid to make prudent investment decisions. A custodian must hold the assets, so there may be brokerage charges for trades. The fee structures for 401(k) plans and IRAs are different because the accounts are subject to different regulations. 

401(k) Summary Plan Description

The U.S. Department of Labor requires 401(k) plan administrators to provide plan participants with an annual disclosure statement. The disclosure statement is referred to as a Summary Plan Description and provides information on the cost of the plan. If you don't have a copy of the most recent disclosure statement, contact your company or the plan sponsor for the information.

In addition to administrative fees, there are other potential costs of a 401(k) account to consider. Some 401(k) plans allow participants to borrow against their account balance at a competitive interest rate. Once you have evaluated all aspects of your 401(k) plan, you are ready to make a comparative evaluation of one or more IRA offerings.

IRA prospectus

Financial institutions that provide IRAs are not required to produce the same annual disclosure statement as 401(k) plans. IRA providers typically produce a prospectus, which is a lengthy, detailed statement presented to you before opening an account. Many IRA providers offer other financial products in addition to IRAs. Therefore, the cost of some IRAs may depend on your overall level of activity with the IRA service provider.

At the close of the first quarter of 2017, mutual funds constituted roughly 48 percent of the total value of IRA assets. Mutual funds are allowed to assess shareholders a charge referred to as a 12b-1 fee. As a result, the administrative cost of some IRAs is likely to reflect the 12b-1 fees associated with ownership in mutual funds.

The administrative fee for any particular retirement account is important, but the long-term performance of the account is much more significant. Contact a financial planner for more advice on selecting the most appropriate retirement account.