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Instead of relying on these investment options, some of which a client might not be comfortable with, they can roll their plan over to an IRA and have nearly the entire universe of options available to them.
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Fees can also play a role in a 401(k) rollover. Fees in a client’s 401(k) might be less than they are in an IRA, or the fees in their 401(k) might be more than they are in an IRA. (This is all situation-based from their employer).
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Rolling over a client’s 401(k) can also help alleviate risk. What if the client doesn't want all of their money invested into traditional market investments that they might feel are too risky and too up and down as they get closer and closer to retirement? By rolling their money out of their employer-sponsored plan, the client gains flexibility and control, and it prevents being overly involved in market risk at a period of time where they probably shouldn't be, or maybe don't want to be. If the client desires something that has no risk of loss, they’re probably going to need to give up upside potential, or they might be tying that money up for a period of time. It is important to let them know that this might be appropriate for some of their money, but it is very rarely appropriate for all their money.
Once past the age of 55, and certainly 59 and a half, is the date that a lot of these options become available to our clients. Some important questions to ask in a conversation with a client are:
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Are there things that you should be taking advantage of available outside that plan that you can't get within the plan?
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Are there tax benefits that you might achieve in rolling some of that after-tax money out?
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Is there some money that you have that you don't plan to spend within the next ten years? (The reality is probably yes—15 to 20 years).
It’s taken years and years of good financial decisions and saving to put many of our clients in the position they’re in today; a position where retirement is no longer a hope, but a reality. Mistakes made close to or in early retirement can put them at risk of running out of money in retirement. Many people feel that keeping their 401(k) in their employer-sponsored program will provide them with the biggest financial rewards, but staying the course might limit their options and put them at increased risk. It is our duty as financial advisors to engage our clients in these important conversations, and present them with the most valuable opportunities to ensure that their family’s retirement is everything they hoped it could be.
Eric Hogarth, CFP, is a partner at Johnson Brunetti in Wethersfield, Conn., and is a member on the team of financial advisors.