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Will rolling over my 401k into an IRA result in higher investment returns?

February 8, 2013

Advisor answers

David Flowers

David Flowers

CFP®
Berkeley, CA

In general, no, your investment returns should be no different between the two retirement plans. Both are simply tax deferred investment accounts.

There could be a difference in fees, however, as a company 401k plan will sometimes have negotiated lower management fees on the mutual funds in the plan and the company may subsidize the administration fees that the 401k plan pays. Larger companies often have the pricing power to get better terms for their retirement plans. By the same token, sometimes companies ...

Allan Moskowitz

Allan Moskowitz

CFP®, AIF®
El Cerrito, CA

Not necessarily. However, it will almost certainly allow you to have more investment options, which logically could help you experience better investment performance. However, there are no guarantees that it will improve your performance. There are other considerations to weigh as well in making the decision to rollover or keep your 401(k) assets with your former employer that may be just as important. Below are some of the pros and cons for each decision:

Pros for keeping your 401(k)

+ Some plans allow distribu...

James Dowd

James Dowd

CPA, CFA
San Francisco, CA

I would answer "most likely" and give three reasons why:

(1) Most 401k plans over-weight U.S. equities, a flaw that falls into the category of "familiarity bias." It is especially problematic when employees naively allocate equally to the funds offered.

(2) Most 401k plans omit most asset classes other than equities and U.S. fixed income. Real estate, MLPs, high yield, floating rate funds, foreign fixed income, preferred stocks... are some of the asset classes that 401k plans generally do not include. Some ...

Alexey Bulankov

Alexey Bulankov

ChFC, AAMS, EA, CFP®, CLU
Redwood Shores, CA

Not any more than moving your wallet from you left pocket to your right pocket will increase the amount of money in it.

However, having access to more investment instruments, professional advice, and paying closer attention to what is going on inside that account all have a good chance of improving your returns.

In my professional experience, rolling 401(k) funds into an IRA and integrating it into the overall plan benefits most investors over the long haul.

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Nick Rugh

Nick Rugh

CRPC
Palo Alto, CA

The short answer is No. The 401k and the IRA are both accounts or arrangements which hold funds intended for retirement and have the same tax benefits. But typically the 401k is more restrictive in the investment options since it is provided by your place of employment and usually limits your investment options. For this reason the IRA may be a better option if you do not like the choices provided by your particular 401k. One benefit of a 401k is that IRAs are not as well protected against lawsuits as are funds...

Gary Alt

Gary Alt

AIF®, CFP®
Pleasanton, CA

Yes, you could earn better returns in an IRA than a 401k. Here's why:

1. Lower costs - A 401(k) has administrative expenses that an IRA doesn't, and many of those expenses are often passed on to the participants. You won't incur many of these expenses in an IRA.

2. No proprietary funds. Have you ever noticed that if your 401(k) is administered by John Hancock or Fidelity, there are a lot of John Hancock or Fidelity funds available? That's because they aren't choosing the best of breed investments from the entire unive...

Ira Fateman

Ira Fateman

CFP®
San Francisco, CA

It depends. There are some employer plans that are very highly rated according to criteria set up by the 401k rating service Brightscope. Check your plan rating on their website. The advantages of keeping your 401k with your previous employer and not rolling them over are

1. you can roll or combine it with your current 401k for simplicity of management.

2. 401k's have a higher protection standard against being sued as mentioned in another answer although IRA now have protection against credito...

Brian Clay

Brian Clay

CFP®, CMFC
El Segundo, CA

While there is no guarantee, rolling over your 401(k) into an IRA should result in higher investment returns simply based on the investments available in each account. Most 401(k) plans have a few dozen mutual funds to choose from and some offer limited asset classes to diversify into. Investing in an IRA will give you access to tens of thousands of options including equities, specific sectors, and alternative investments that can increase your return and limit your downside.

The key to all of this is knowing what to do wi...

James Shagawat

James Shagawat

MBA, ChFC, CFP®
Fair Lawn, NJ

When rolling over to an IRA, do it smart!

The best way to rollover your 401(k) to your IRA, contact your 401(k) plan administrator and tell them you want to do a ‘Direct Rollover’ to your IRA.

They will make your distribution check payable to the new IRA custodian. For example, payable as “Charles Schwab F/B/O John Smith IRA” and mail it directly to the receiving custodian or to your home. Do not sign the check. The custodian signs it.

After Tax in a 401(k) to IRA

The portion of the benefit that represents after-tax contributions s...

Hildy Richelson

Hildy Richelson

Blue Bell, PA

Funds in an IRA will enable you to purchase individual high quality bonds. High quality bonds will return invested principal when the bonds come due. They will provide consist cash flow. If interest rates rise, you will be able to reinvest the cash flow at the higher rates. Rising interest rates are the upside for individual bonds.

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Dmitriy Fomichenko

Dmitriy Fomichenko

Anaheim Hills, CA

I would say that probably almost all employer sponsored 401k plan have limited investment options. So if you have a 401(k) with the past employer and now eligible to roll it over into an IRA I would do it.

You will have more investment options with most IRAs. Also, you may want to consider establishing a Self-directed IRA. You will need to find a special custodian who will not limit your investment options at all and you will be able to invest in non-traditional or alternative investments such as real estate, precious metals, tax liens...

Dave Anthony

Dave Anthony

RMA, CFP®
Broomfield, CO

This depends, what are the fees and expenses inside of your current 401(k)? Get your funds holdings and check out the fees at http://Morningstar.com. Next, calculate what your MAR RATIO has been for your portfolio. What is the return adjusted for risk? (CAGR/Maximum Drawdown.)

Now, with this information, compare that to what your Individual IRA options are. Do you have a detailed risk-based money management plan to protect profits when the market goes south? Calculate those same ratios and compare.

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