The best thing to do with your old retirement plan

After years of diligently saving for retirement, you have a big marketing bullseye on your back. Forget millennials. Financial advisors and brokerages are eyeing baby boomers and their hefty share of the $7.7 trillion invested in workplace retirement plans like 401(k)s or 403(b)s.

By getting you to move that money into an individual retirement account (IRA)—what the industry calls a rollover—they can collect fees on your funds. The rollover business is booming, from less than $320 billion in 2007 to more than $460 billion in 2015 (the latest data available).

An IRA rollover pitch might resonate right about now. As retirement looms (or is already upon you), dealing with the 401(k)s you left behind at old jobs may be high on your to-do list. Same goes with your current 401(k) when you do retire.

The decision of what to do with your retirement plans is a fraught one. Get it wrong, and you could have less money to live on later.

A 2015 government report estimated that the high-fee products pushed by rollover-happy advisors can reduce investment returns by around 1 percentage point a year, a painful penalty when a conservative stock and bond portfolio might earn 4% a year or so.

With your retirement security on the line, these moves will help you weigh your options.

Why you can (and should) take your time

When you retire or switch jobs, you have a few good options for your workplace retirement plan: Roll it into an IRA, roll it into your new workplace plan (if the new company allows that), or do nothing (as long as your account is worth at least $5,000, you can typically keep your money right where it is).

Of course, you technically have a fourth option: Simply take the cash. But if you do that before before age 59½ (or age 55 if you’ve already left your job), you’ll face a 10% penalty. Don’t do that.

And the advice you get from a financial pro may not always be in your best interest. Indeed,  a 2013 report by the General Accountability Office found that retirement plan participants “are often subject to biased information and aggressive marketing of IRAs when seeking assistance and information regarding what to do with their 401(k) plan saving.”

“A decade ago, the decision to roll over was more obvious,” says Peter Lazaroff, a certified financial planner and co-chief investment officer at PlanCorp, an advisory firm that manages $4 billion in client accounts, including rollovers. One reason: the previously high management costs in many company plans.

“But fees have come down, technology is improving, and there is more education advice attached to 401(k) plans,” he explains. “It’s not always a given that rolling out makes the most sense.”

The case for doing nothing

You come first. Under federal law, a 401(k) plan must operate in the best interests of participants, or what’s known as the fiduciary standard, and a major part of that is a focus on plan costs. Advisors and brokers have a choice of whether they want to act as fiduciary.

Some do. Many don’t, and brokers who do not can get away with recommending “suitable” investments that may not be the best or cheapest options for you, but earns them more in fees.

You likely enjoy a bargain. “When you are rolling over into an IRA it is almost always going to be more expensive,” says Aron Szapiro, director of policy research at mutual fund research firm Morningstar. “If you are working for a Fortune 500 company you are getting institutional pricing. It better be less than what you would pay in an IRA.”

According to a study by Brightscope and the Investment Company Institute, total investment and administrative costs for plans with at least $500 million in assets was less than 0.50% in 2015, the most recent industry-wide data available.

Plans with at least $1 billion had an average cost of 0.36%. If your plan has at least a few hundred participants odds are high you’re paying low fees.

You need the money early. It’s never a smart strategy to tap retirement funds in your 50s, but in true emergencies you may need that escape valve.

If you leave a job after turning 55 you can make 401(k) withdrawals without owing the 10% early withdrawal penalty that is typically levied before age 59½. Withdrawals from IRAs made before age 59½ are hit with the 10% penalty.

The case for rolling over to an IRA

You crave simplicity. Even moderate job hopping over the past few decades could mean your household has more than five or six 401(k)s floating around. All those stragglers can make it hard, if not impossible, to develop a single stock and bond allocation and monitor your mix.

You’ll also face heavier lifting later. Once you turn 70½, you must start taking required annual minimum distributions (RMDs) from each of those accounts, and then report each on your tax return. Getting all (or most) of your accounts under one roof can simplify your life.

Your costs are high. Especially if you work for a small company, press your plan administrator, or H.R., for your total annual costs, including administrative fees and the fees charged on the funds. If it’s more than 1 percent, you could save by rolling over to an IRA and buying low-cost index funds.

Online advisors such as Betterment or Wealthfront and the portfolio advisory service from mutual fund company Vanguard use computer modeling to recommend and manage an age-appropriate strategy, with a total cost that can be around half of a percentage point.

You have a Roth 401(k). With a Roth, you miss out on a tax break on your contributions but get tax-free withdrawals. Money that stays in a Roth 401(k) is subject to annual required minimum distributions once you reach age 70 ½, just like with a traditional 401(k).

Roll it into a Roth IRA, and you can take withdrawals only when you need the money.

You have company stock. If you’ve got a chunk of company stock in your 401(k), a rollover can be a “beautiful” move says Elijah Kovar, an advisor at Great Waters Financial, in the Minneapolis-St. Paul area.  The reason comes down to taxes, and it’s complicated (so best to chat with a pro).

Simply put, you’re allowed to roll that stock into a taxable account and by doing so you’ll pay taxes upfront but potentially owe lower taxes on your gains in the future.

You may leave your plan to your kids. If anyone other than your spouse inherits your 401(k), the plan administrator may insist the beneficiary take all the money at once, or over five years, which can create big tax bills. Move the money to an IRA and your beneficiaries will be able to pace withdrawals based on their life expectancy.

How to hire good help 

Working with an advisor can be one of your smartest moves at this stage of your life. Not only is getting clear-eyed advice on your retirement plans financially valuable, but a pro can provide emotional guardrails, helping you avoid costly mistakes.

Many advisors make a living by charging clients a percentage of the assets they manage. Typically that’s around 1%. That’s an incentive for advisors to push you into an IRA. But good advisors don’t insist on a rollovers.  

This is where working with a fiduciary—who puts that in writing—is so important. Members of the National Assocation of Personal Financial Advisors are fiduciaries. If you don’t have other assets for an advisor to manage, you might have to pay an hourly fee or perhaps a flat annual fee for help.

“I’m an advisor, and I would love for everyone to roll over their 401(k), but sometimes they are in a plan that is so cost-effective it would be awful for them to roll it to us,” says Lazaroff, who for the record, works as a fiduciary. “There is not an advisor in the world who can’t build around a 401(k),” says Lazaroff.