Rolling Into IRAs

As to whether a participant leaving a job will do better to move his defined contribution (DC) plan assets into his new employer’s retirement plan or an individual retirement account (IRA), the experts see more value in the former.

Still, there are pluses to converting a 401(k) account to an IRA. Should participants choose that option, they can invest in any type of instrument, notes Steve Bogner, managing director and partner at Treasury Partners.

Another benefit to an IRA is that, should the account holder die, his beneficiaries will have the option to take the distributions over their lifetime, says Larry Steinberg, chief investment officer (CIO) at Financial Architects Inc. Beneficiaries of money from a 401(k) must take the money within five years, he says.

Besides these two benefits, IRAs have some drawbacks, which sponsors might want participants to understand. First are the retail vs. institutional fees that participants will pay, notes Ric Edelman, co-founder and chairman of financial education and client experience at Edelman Financial Services.

IRAs also lack the protections of qualified plans, which are overseen by the Employee Retirement Income Security Act (ERISA) and require the sponsor to act in its participants’ best interests, Steinberg says.

Moreover, an IRA-holder may contribute only $6,000 a year; in 2020, 401(k) participants may contribute $19,500, says Brett Tharp, CFP [Certified Financial Planner], at eMoney Advisor.

Another drawback to IRAs is that creditors can lay claim to the money. They would have a hard time doing so in an ERISA 401(k) plan, Steinberg says.