Episode 37
A Deep Dive into 401(k) Rollovers: Making Informed Retirement Decisions

Table of Contents

• Introduction
• Listener Question on Long-Term Care Insurance
• Mike’s Answer to the Listener’s Question
• Discussion on Wall Street Journal Article
• Benefits of Rolling Over a 401(k) into an IRA
• Reasons to Keep Money in a 401(k) Plan
• Role of Fees and Costs
• Fiduciary Protections Between 401(k) Plans and IRAs
• Impact on Estate Planning
• Challenges for the Financially Uninformed
• Role of Access to Annuities
• Comparing Withdrawal Ages for 401(k) and IRA
• Missing Points and Misconceptions in the Article
• Conclusion

Introduction

Madison: Hello, everyone, and welcome to Not Just Numbers—Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora, and I am here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer, and his law firm is Yardley Estate Planning. Hey, Mike.

Mike: Hey, Madison. How are you?

Madison: I’m good. How are you doing today?

Mike: I’m pretty good.

Madison: Good.

Mike: I mean, it’s Monday, but it’s a beautiful day, so there’s that.

Listener Question on Long-Term Care Insurance

Madison: Yeah. All right, so before we get into today’s topic of discussion, we received some fan mail over the weekend from one of our listeners in Michigan. All right, Mike, so here is what our listener is asking: “I just listened to the episode on long-term care insurance. Is there any rule of thumb for the threshold of your nest egg value that would allow you to pay for long-term care without purchasing long-term care insurance? For example, if you and your spouse have a three-plus million nest egg? Thanks.”

Mike’s Answer to the Listener’s Question

Mike: Well, that’s a great question, Madison, and I think people will disagree and have differences of opinion on what is appropriate here. So I think—I’ve seen people with long-term care—I joke that I’m Switzerland. I see people who have had great experiences and people who have had what they tell us are terrible experiences, often with the same long-term care insurance company. So I think this is a situation where you need to look at what your finances are. If you’re interested in it, talk to an insurance agent or broker, get some quotes on what might be acceptable levels of insurance, and see if the premium seems worth it to you.

The thing about long-term care insurance is, you know, you don’t know whether you’re going to need it or not, right? Two-thirds of people wind up having some type of stay in a nursing home or assisted living facility, and the average stay is about 400 days. And so, it might make sense for some people to get insurance, and other people might decide it’s not for them. With a $3 million nest egg, they could last a long time without going through that. And it’s a case where long-term care insurance isn’t going to cover all of the costs unless you pay a really big amount in premium. Because you make choices as to how much coverage you’re gonna have per day, how long it would be, how long do you have to be in the home before the insurance kicks in, whether it adjusts for inflation or not. There’s a lot of complicated decisions in it.

So I think it’s best if people are thinking about it, they contact an agent or two or a broker or two, maybe run some numbers and see if they think it makes sense for them. And if they’re not sure, run it by somebody else—maybe a financial planner or a loved one or their accountant or somebody.

Madison: Okay.

Mike: Sorry there’s no bright-line answer that if you have X amount, then you should definitely get it or definitely not get it. It’s a complicated decision, and people have to do what they think is best.

Madison: Yeah. Yeah. I mean, I feel like we talk about that on the podcast all the time—you know, what’s good for someone else is a different situation, and it could be totally different for you. It could be great for them and not so great for you. It all comes down to what goes best with your plan.

Mike: Yeah, great answer.

Discussion on Wall Street Journal Article

Madison: All right, so today, moving on, today’s topic of discussion—we are going to discuss an article from the Wall Street Journal, and it is titled, “What Should You Do With Your 401(k) When You Retire?” And this is by Olivia Mitchell. And the article will be in the description below.

All right, Mike, so here’s the summary: The article discusses the financial decisions retirees face regarding their 401(k) plans—whether to roll over their savings into an Individual Retirement Account (IRA) or leave the funds in their employer-sponsored 401(k). Rolling over to an IRA offers benefits like more investment options, including ETFs and unconventional assets, account consolidation, and flexible payouts. However, fees can be higher, and some advisors may steer clients away from lifetime income products. Leaving money in a 401(k) often results in lower costs and better fiduciary protections, as employer-sponsored plans typically offer lower investment fees and legal safeguards. Additionally, 401(k) funds are protected from bankruptcy claims and allow penalty-free withdrawals at age 55, unlike IRAs, which allow this at 59 and a half. Simplicity and reduced decision-making make 401(k)s appealing to those less financially literate. Other factors like estate planning, beneficiary rules, and the size of the retirement account also play crucial roles. In the end, the best choice depends on an individual’s financial literacy, account size, and the relative cost of each option. All right.

Benefits of Rolling Over a 401(k) into an IRA

Mike: Great summary. Thank you.

Madison: Of course. So what are the primary benefits of rolling over a 401(k) into an IRA, and how do they compare to keeping the money in a 401(k) plan?

Mike: Sure. I think the primary benefits of rolling a 401(k) into your IRA is you get the greater choice of the available investment options in your IRA and also simplicity. A lot of people now have many, many accounts—401(k)s from different jobs. So when people come to us and we start to manage their accounts for them, they often have three, five, seven different 401(k)s, maybe more. And they could have probably rolled those 401(k)s into their current 401(k) when they left one job, or they could have, each time they left a job, rolled it into an IRA. But people aren’t really sure what to do often, and so they leave their 401(k)s there. I don’t think it’s always a conscious choice. It’s always like, “Hey, I’m getting a new job, I have all this stuff to do,” and then the 401(k) is just there, and the old employer doesn’t make them take it out, so it stays there.

The relative benefits of an IRA are you can invest in anything you want, and you can streamline—have like one IRA for pre-tax monies. The benefits of the 401(k) primarily are you can have some cheaper investment options, and there can be greater protection from creditors than an IRA, although it’s not as much as she indicates in this article, and we’ll get to that later.

Reasons to Keep Money in a 401(k) Plan

Madison: Okay. Why do some retirees choose to leave their money in a 401(k) plan after retirement, and what advantages does this decision offer?

Mike: So, I think a lot of times they do it because they’re comfortable with where they worked. They’ve been using the 401(k) maybe for years, and so they know what the investment options are, and they’re happy with them, and they know how to log in easily enough. They know what they’re doing. And in financial areas, inertia is a big, big thing. Once people get set in what they do, they don’t really like to change. So, I think those are the main reasons people keep their 401(k)s with their old employers.

Role of Fees and Costs

Madison: Okay. What role do fees and costs play in the decision to roll over a 401(k) to an IRA or leave it in an employer plan?

Mike: So, you know, 401(k)s are, for the most part, much better managed than they were 20 or 30 years ago. I think they do a much better job of having a good lineup of available funds like index options, target-date options, and especially among larger employers, they get really good costs, so they keep the costs pretty low on those. But in an IRA, you could buy ETFs that are the lowest cost you could get. So, there’s really not a big difference cost-wise anymore between 401(k)s and IRAs.

Fiduciary Protections Between 401(k) Plans and IRAs

Madison: Okay. How do fiduciary protections differ between 401(k) plans and IRAs, and why is this an important consideration for retirees?

Mike: Okay, so one of the things that this lady wrote in the article is that 401(k)s are protected from creditors by ERISA, which is the law—the Employee Retirement Income Security Act of the early 1970s. And that is true. However, most states also protect IRAs from creditors. So, Pennsylvania and New Jersey also protect the majority of your IRAs from creditors. There are some exceptions, so inherited IRAs don’t count in that. But the IRAs that you’ve put together will have generally the same protections as 401(k)s. So, she said there was a difference in the article, but I’m not a bankruptcy lawyer, but a simple Google search and the history that we’ve known over the years would show that that’s not the case. So maybe slightly better or all-encompassing protections in 401(k)s, but you get like 99% of protection in IRAs, at least in Pennsylvania and New Jersey. In other states, it could be very different, but most of our listeners are in PA and New Jersey.

Impact on Estate Planning

Madison: Yep. All right, so what impact can retirement saving decisions have on estate planning, particularly when comparing IRAs to 401(k) plans?

Mike: Well, one of the things that she mentioned in the article is in the 401(k) plan, a lot of places—she said that your spouse has to inherit 50% of it or more. I didn’t know that was a thing, and I didn’t look to see if that was, but I know in 403(b) plans that is often the case. Like if you want to roll over an IRA—roll it to an IRA—even your spouse has to agree because they’re losing some protection. But in an IRA, you can name whoever you want. You’re not limited to the choice in the 401(k). For some people, that might be important, right? Like what if your spouse has enough and you want to leave money to your kids instead, or your grandkids, or your charity—whoever or whatever’s important to you.

Challenges for the Financially Uninformed

Madison: Yeah. So, for retirees who are not financially literate, what challenges might they face when managing an IRA versus staying in a 401(k) plan?

Mike: Sure. If you’re not really financially literate and you have a 401(k) and you know how to log in and you know what the options are, it’s all kind of set up there for you. If instead you roll it to an IRA and you have the whole world at your feet and you can invest in whatever you want—yeah, that could be a little bit scary, and maybe you would make some bad decisions. So if you really don’t know what to do or what you’re doing and you don’t want to pay for any kind of advice, then sticking to your 401(k) might be the right answer for you.

Role of Access to Annuities

Madison: Yep. All right. So, what role does access to annuities play in the decision to choose an IRA or a 401(k) for retirement?

Mike: So in this article, what she mentioned was that most 401(k)s don’t offer annuity options, although the Secure Act 2.0 now allows them. And so gradually we’ll see them filter out into the 401(k) space. Like the Roth 401(k) option—it took a few years for it to become like the normal thing that’s available. And in IRAs, you could buy annuities.

Comparing Withdrawal Ages for 401(k) and IRA

Madison: Okay. All right. So how does the ability to withdraw money earlier from a 401(k) starting at age 55 compare with the flexibility of IRAs, which impose penalties for withdrawals before age 59 and a half?

Mike: Sure. So, you can take money out of your 401(k) at fifty-five, and if you just take a normal distribution from your IRA, you have to wait till you’re 59 and a half. There are a couple of caveats here, though. So, your 401(k) provider may limit how often you can make distributions; there may be some sort of limitations on what you do, whereas in an IRA there just aren’t going to be. You could take a little bit of money out every day if you want to.

In terms of allowing the distributions, one thing she did not point out in this article—and we’ll get to some other oversights later—is from your IRA, you can take distributions without penalty before 59 and a half, but you have to use something called Rule 72(t). 72(t) is a little exception—you don’t see it too much anymore, but it used to be common. As long as you could start withdrawing early, but you have to take substantially equal periodic payments. There’s three different ways you could figure out how to calculate those payments, and you have to take those payments for five years. But, so if you’re going to retire and your money’s all in an IRA and you’re 57, you can figure out how to do that without paying a tax penalty, or you could pay somebody to figure out how to do that without taking a tax penalty. So, I’m surprised that she didn’t mention that in the article.

Missing Points and Misconceptions in the Article

Madison: Okay. All right, Mike, so we spoke a little bit before we started recording today. So there were a few things that you said that were missing or…

Mike: Yeah, so, look, this is complicated, but when I reread the article this morning, it reminded me that in addition to it being a big decision people have to make whether to roll their 401(k) to an IRA—one of the bigger ones that people take upon retirement—the other thing is, there’s a lot of stuff in here that’s either factually inaccurate or it leaves stuff out. And this was written by a woman who’s a professor at Penn. She went to Harvard; she has a PhD. She has all kinds of accolades, and she’s a big proponent of financial literacy. And there’s a lot of stuff in here that just doesn’t seem right, you know, and let’s go through them.

Like one of the considerations, she says, is that an additional consideration is that some financial advisors might be biased against offering lifetime income products in IRAs when they can earn higher commissions by steering clients away from annuities. That just is a non sequitur to me. That makes no sense to me. So maybe she meant immediate annuities, or maybe she meant fee-only advisors would steer people away from annuities. But as we’ve said on this podcast, in most of the episodes, too many people buy annuities that shouldn’t based on their situation and really don’t understand the rules. So, her saying that advisors would be biased against annuities just doesn’t strike me as right.

Another thing she says is employer-sponsored 401(k) plans tend to offer less costly pricing on investments and advice compared with IRAs. So, for this, that would be a reason to use a 401(k). Although earlier in the article she said 401(k)s mostly don’t offer ETFs, which is true. But IRAs you could buy ETFs, and ETFs tend to be cheaper than mutual funds. So, in terms of the products, you can buy really cheap products in both places. And I would say, if you’re given a choice of the cheapest products in your 401(k) versus the cheapest products in the investment universe, the IRA would have some cheaper products. It just would. That’s not saying that’s the only thing you need to consider or that’s like the most important thing, but the lower cost is important.

The other thing she says is advice—less costly advice. I don’t know where—I don’t know that you get advice on how you should invest your 401(k) from your 401(k) provider. They offer all sorts of education; there’s great tools in most 401(k)s; they have websites you can sign up to learn about all kinds of things. They’re not going to tell you what to buy in your 401(k), and they are not going to manage it for you.

That got me to the next paragraph where she says it’ll cost two-tenths of a percent in a 401(k) versus 1% in an IRA. Well, she’s comparing the price of the products in the 401(k) with the advice that an RIA or a financial advisor would provide. They’re not the same thing. You can’t buy that advice in the 401(k). It’s not an apples-to-apples comparison. That just doesn’t make any sense.

Then two paragraphs later, she says in 401(k)s, you could get target-date funds so you don’t have to make active decisions and your account can get gradually more conservative over time. Guess what? You could buy a target-date fund in an IRA. And the difference is in the 401(k), you could buy the target-date funds by the provider in your 401(k). In your IRA, you could buy any target-date fund you want. So, the target-date fund is not an advantage of a 401(k).

She says another point is that 401(k)s—large employers are holding on to 401(k)s when people leave and encouraging them to stay because they want economies of scale. And she says larger companies in particular can negotiate lower fees from record keepers and money managers—something IRA investors are not likely to do on their own. The first part of that is true; bigger plans can get lower fees on record keepers and money managers. IRAs don’t need record keepers, so that’s not an advantage. And then money managers—she’s talking again about the products. You know, your Apple 401(k) probably has really cheap investment costs, and the fund managers probably don’t charge a whole lot because it’s a giant 401(k) plan. Again, there are ETFs out in the universe that are two or three basis points, so there’s no great savings there. Maybe some of the investments in the plan are cheaper in the plan than they are by buying it yourself at Schwab or Fidelity or Vanguard, but I doubt it. And if it is, it would be a minuscule difference on products that are already really cheap—already really cheap. And again, you’re not going to get advice. She talks about money managers—like you can’t get advice in that 401(k).

Then she says a related factor is that 401(k) assets are legally protected from bankruptcy claims while IRA money isn’t. This should be an important consideration for anyone potentially facing a financial setback in later life. So, we said earlier in Pennsylvania and New Jersey, and I think in most states, they are protected—maybe not entirely protected like the 401(k), but mostly protected.

We go to the next thing—talks about withdrawing before 59 and a half. And as we said before, the 72(t) is an exception.

And then she does—the very last thing she says is a benefit of a 401(k): If you are working for an employer and you want to continue working in your seventies when you’re at the required minimum distribution age, you don’t have to take required minimum distributions from your 401(k) if you’re still working and you’re not a 5% or more owner of the place. Right. So if you are working—if you, Madison—so if you are working here and you’re 75, you don’t have to take required minimum distributions because you’re not a 5% owner.

Madison: Yep.

Mike: I would have to take required minimum distributions because I am a 5% owner. So if you do work for a company that you don’t own, a 401(k) would have the benefit of allowing you to continue working, saving, and not having to take the required minimum distribution out. I don’t know how often that exception is used because I don’t think there’s tons of people that are still working at 72 or 73. But there are—I mean, I’m sure there are some. So, yeah, so that’s it. You know, I went on this rant here because this stuff is complicated, and there are like seven or eight instances here where either the advice is really not great or it doesn’t include some big factors. And so, I understand why people get frustrated with this area because this is the Wall Street Journal—a great source for news. Yeah, it shouldn’t be that way.

I did notice that there’s a difference between this online version and the paper one. I initially cut the paper one out, handed it to you because it’s an important question—what you do with your 401(k) when you retire. And there are one or two things that I thought were a little bit off, but the online version that’s still up there—we printed it out today—has a lot of stuff that’s not really accurate. So, yeah, there you go.

Conclusion

Madison: Yeah. And like you said, I could totally see it being frustrating. I mean, that’s one of—probably one of the most popular questions you get when someone comes in is, you know, “I have a 401(k), I’m retiring soon. What should I do?” That has to be one of the most popular questions you get.

Mike: Yep. We get it all the time.

Madison: Yeah. And then you read an article in the Wall Street Journal, and it’s kind of misleading or, like you said, it’s not really comparing the apples to apples. I could see how it could be frustrating for some.

Mike: Sure. You know, and I may have—when I said people have like three, five, seven—I may have undercounted, right? Like, so we have a new client who sent an email this morning that she found—she did find one old 401(k) that she had thought she had forgotten about, and then she just found another one over the weekend, right? And so, she is not at retirement age yet, and that will—she’ll have had—she has five, including her current one. So she’ll have four old ones. And she’s more than a decade away from retirement, so who knows how many she’ll have? She would have if she didn’t hire us by 59 and a half.

Madison: Yeah, absolutely. All right. Is there anything else you would like to add to this episode, Mike?

Mike: No. No. Thank you so much for the questions and allowing me to go on that little bit of a rant. It is a good question, and I think that most people’s circumstances—it depends—a lot of this stuff. I think that she made some good points in that if you’re not really financially literate, the 401(k) can be an easier option—a little bit less daunting. That’s totally true. I don’t want to totally trash this lady because she did lay out a lot of good stuff, but I was surprised at how many things weren’t really right.

Madison: Yeah, absolutely. All right, Mike. Well, thank you for everything. Thank you for all the information. And I really hope that this helps guide some people in the right direction.

So, for more information on Yardley Wealth Management or Yardley Estate Planning, you can visit our websites at yardleywealth.net and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. Don’t forget to smash the like button if you enjoyed this episode. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.