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Getting Rolled

Kenyon Sayler

THE SECURITIES AND Exchange Commission recently proposed that registered financial advisors be compelled to act as fiduciaries when recommending rolling over 401(k) money to an IRA. Whether this rule gets adopted or not, plenty of advisors are eager to help investors with the issue.

Indeed, as I approached retirement, a number of advisors contacted me about rolling over my 401(k). Of course, these advisors also offered to manage my funds for a fee, usually around 1% a year of assets. I joined colleagues at a few lunchtime seminars that were put on by advisors who worked mainly with retirees from our employer. A couple of my friends ended up hiring one of these folks.

These advisors were, I believe, offering sound advice. Some colleagues had no interest in building a portfolio on their own, let alone understanding the complexities of when to claim Social Security or how to manage their income to reduce the Medicare premium surcharge known as IRMAA.

My quibble was with the amount the advisors were charging for their services. Let’s assume an engineer had been contributing to a 401(k) for 40 years, and the company had been matching part of those contributions. It wasn’t unheard of for the engineer to have a $1 million 401(k).

Although there were expenses associated with the 401(k), our company had chosen the plan provider carefully and the costs were minimal. By contrast, an advisor charging 1% of assets per year would be pocketing $10,000 annually from a $1 million IRA.

Let’s assume advisors were charging $500 an hour for their time. That would imply that they should be spending about 20 hours a year to develop a financial plan for you. In your first year as a client, as they get to know you and your goals, 20 hours seems like a reasonable estimate of the time they might spend on your account.

My concern was the second year: Was it really going to take another 20 hours that year, and every year thereafter? Although the advisors we spoke with were suggesting rolling the 401(k) into a series of low-cost exchange-traded funds, there’s a risk some advisors might recommend ETFs with higher fees than we were paying in our 401(k).

What did I do? Did I keep my money in the company 401(k)? Did I hire an advisor? My decision was based on a desire to simplify our finances as much as possible for my wife, should I die before her. I rolled the 401(k) over to an IRA at the brokerage firm we use for our taxable account investments, and then built my own portfolio.

The table below shows the cost of a hypothetical $1 million account at both Vanguard Group and Fidelity Investments, compared with my old employer’s 401(k). While Vanguard and Fidelity don’t offer funds tracking the exact same indexes as the 401(k) provider, you can get pretty close by choosing similar categories. As you can see, by carefully selecting low-cost funds, it was possible to keep costs comparable when moving to an IRA—and there was an opportunity to cut expenses.

Once I completed the rollover, I spent a few hours planning conversions of my IRA money to Roth IRAs, so I’d minimize future Medicare premium surcharges. All in all, I believe I’ve captured 90% or more of the benefit that an advisor might provide, and for a far lower cost than 1% of assets.

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