As to the question of whether a participant leaving an employer is better suited to move their money into their new employer’s retirement plan or an individual retirement account (IRA), the experts see more value in the former.
However, there are some pluses to moving into an IRA. Should participants roll their money over to an IRA, they will be able to invest in any type of instrument, notes Steve Bogner, managing director and partner at Treasury Partners. Another benefit of an IRA is that, should the account holder die, their beneficiaries will have the option to take the distributions over their lifetimes, which is known as a “stretch IRA,” says Larry Steinberg, chief investment officer at Financial Architects Inc. By comparison, beneficiaries of the money from a 401(k) must take the money within five years, he says.
Besides these two benefits, however, the experts say there are a number of drawbacks to moving the money into an IRA that sponsors might want to make their participants aware of—first and foremost of which is the retail versus 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 do not have the protections of qualified plans, which are overseen by the Employee Retirement Income Security Act (ERISA), requiring sponsors to act in the best interest of their participants, Steinberg says.
In addition, IRA contribution limits are $5,500 a year, whereas 401(k)s permit contributions of $19,000 a year, says Brett Tharp, CFP senior financial planning analyst at eMoney Advisor. Yet another drawback with IRAs is that creditors to lay claim to that money, whereas it is very difficult for that to happen in an ERISA 401(k) plan, Steinberg says.