There are two types of people in the world: those who believepeople can fend for themselves and those who think they can’t. Ifyou fall into the latter category, read this article are yourown risk.

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I recently published an article where I interviewed severalfinancial professionals. In it, they discussed the increasedfiduciary liability imposed on 401(k) plan sponsors when formeremployees opt to leave their assets in their old 401(k) plan ratherthan roll over those assets into an IRA. The article (“Ex-EmployeesWho Don’t Rollover – Will 401k Fees Increase Plan SponsorLiability?Fiduciary News, June 28, 2011) noted mostfinancial planning textbooks suggest employees should take theirretirement savings out of their old company’s plan. It alsoacknowledged this adage remains controversial.

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The controversy ends here.

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First, let’s agree there’s no such thing as an absolute.Therefore, anything I'm about to say has an exception. But, beforewarned, those exceptions only prove the rule.

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Here’s the blunt premise: It's in the best interest of allparties for ex-employees to roll over their retirement funds intoan IRA. And by all parties, I mean the 401(k) plan sponsors, theplan’s current employees and the ex-employees themselves. Here’swhy – costs and control.

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A 401(k) plan requires service providers (and their associatedcosts) that IRA plans do not. This means even when a 401(k) plannegotiates lower expense ratios for the mutual funds it offers,there are still administrative and compliance related fees on topof that. In some cases, the company pays these direct fees. If thecompany pays administrative and compliance fees for individuals nolonger under the employ of that company, this hurts the company,its shareholders and its current employees. In many cases, thecompany doesn’t pay these fees (and a DOL report concludesthis is increasingly the trend), saddling the costs on theformer employees.

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With this in mind, the 401k Averages Book suggests the average total bundleof fees in a typical 401(k) plan ranges from a minimum of 30basis points to a maximum of 3.94% with a median range from 0.92%to 2.72% (this covers plan sizes ranging from $0.25 million to $250million). You can see this range is quite large, but it still showsthat even in some quite large plans, the total costs far exceed thecosts associated with an IRA.

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For example half of the $100 million 401(k)plans exceed 1% inannual costs – meaning anyone with retirement assets exceeding afew hundred thousand can easily hire a personal fiduciary (a.k.a.,a registered investment adviser). RIA fees generally start at about1% and go down depending on the size of the account. This is theequivalent of jumping from a city bus (i.e., the 401(k) plan) withits pre-scheduled drop-off points to a chauffeur-driven limousine(i.e., an IRA) that offers door-to-door service. Who wouldn’t wantthat?

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This isn’t to say some employees make unfortunate decisions andjump from the frying pan into the fire by choosing a high costalternate for their IRA rollover. The point is, there are low costalternatives available. Admittedly, in the extreme case theexisting 401(k) plan will be cheaper (admin and compliance costsincluded) than an IRA. Certainly, if you’re in a $250 million401(k) plan with a total cost of 30 basis points, you’d be hardpressed to beat that on price alone (unless you limit your optionsto index funds).

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But we can’t view the issue on price alone. The lack of controloften compels many former employees to take their 401(k)assets when they leave (and also provides the primary reason whymost financial planning text books suggest they not leave theirfunds with the old company). Going back to our hypothetical 30bp401(k) plan, what if that low cost was achieve solely by limitingthe investment options to index funds. Some former employees,after seeing how much better actively managed funds performed vs.index funds in the “lost decade,” might prefer to pay more justto broaden their options.

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In general, it is precisely this greater control, on top of thealready mentioned higher fees, which might be responsible forincreasing the 401(k) plan sponsors fiduciary liability shouldex-employees leave their retirement assets in the company plan.Very rarely does a 401(k) plan provide an investment option notavailable to IRAs. Even the much loved stable value fund is now available to IRAs.

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So if rolling over is better for the former employee andretaining assets is worse for the 401(k) plan sponsor, why don’tthose 401(k) plan sponsors just say “buh-bye” to former employeesby requiring them to clean out their retirement assets when theirdone cleaning out their desks?

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Christopher Carosa

Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).