Investment fees are not a significant factor in the decision for near and recent retirees to roll their retirement savings from a 401k into an IRA according to a new issue brief from The Pew Charitable Trusts, released on Sept. 30.
To help identify how fees factor into the decision to roll over retirement savings into an IRA versus other plan options, Pew surveyed older workers (also called near retirees) and recent retirees, asking to what extent fees would be or were a motivating factor in their decision and how they would react if they learned that fees in the IRA were higher than their current plan.
Lower fees do not appear to motivate participants to either keep their savings in a current retirement plan or to roll their savings into an IRA when they retire.
However, when asked about the possibility of rolling their savings into a higher-fee IRA, many said they would not move forward with such a rollover, and it’s possible that a retiring worker would research the fees associated with alternative IRA investment products. But given that fee disclosures are generally opaque and difficult to understand, as found in prior Pew research, many people will end up in higher-cost IRA investments that erode their savings during retirement. Many will not fully realize the impact this will have on their savings over the course of their retirement.
Given that fee disclosures are generally opaque and difficult to understand … many people will end up in higher-cost IRA investments that erode their savings during retirement.
The survey results also show that retirees and near retirees alike are motivated by the desire for greater control over their savings when choosing or planning an IRA rollover. Both groups are also interested in gaining greater access to financial advice and guidance.
More broadly, the survey examined how retirees and older workers consider what to do with their savings when they retire. Previous research has found that IRA owners were motivated to roll over savings in order to preserve tax advantages, to consolidate their savings, and to not leave their assets with their former employer—findings that generally align with Pew’s survey.
Further insight as to why retiring workers make the choices they do could better prepare employees for retirement and inform employers and policymakers as they seek to provide greater support for retirees, the issue brief states. This assistance could range from improved education opportunities to shifting default options that better preserve savings in low-cost plans while still giving workers and retirees access to financial advice and options that provide sufficient control over their investments.
Among the survey’s key findings:
- Some recent retirees transferred their savings to IRAs (46%), while others reported leaving their savings in their most recent employer plan (54%). In contrast, near retirees were less likely to plan on leaving their savings with their employer plan at retirement.
- A quarter of near retirees said they were unsure about what they planned to do with their retirement savings, and only 16% said they would roll over their savings into an IRA.
- Half of near retirees and 55% of retirees cited their preference for their employer-sponsored plan’s investment options as the most important reason for not moving their retirement savings from their current plan.
Communication can impact decisions
The issue brief went on to state that because near retirees were not certain about what they would do with their savings, they may be amenable to interventions such as targeted education, policy nudges, or default options that preserve assets in low-fee investments unless the worker affirmatively opts out.
Because near retirees were not certain about what they would do with their savings, they may be amenable to interventions such as targeted education, policy nudges, or default options…
Policy nudges could include providing reminders or illustrations about the impact of fees at key decision points (such as when someone is rolling their savings into an IRA), or creating explicit default options that would automatically keep savings in a low-cost account or plan after retirement unless a retiree chose another option.
Employers are increasingly willing to allow workers who terminated employment to leave their savings in the employer’s retirement plan, the brief notes, which could affect their decision to roll their savings into an IRA.
Workers were most motivated to stay in their current plan because they preferred the investment options—a reason cited by 50% of respondents as the most important reason, and mentioned by nearly three-quarters (73%) as at least one reason why they intend to leave their savings in their current plan when they retire. More than half felt that staying in their current plan would be convenient.
The issue brief concluded that future Pew work might explore the feasibility and efficacy of putting savings into low-fee investments as a default option at retirement that the participant can change at any time.
SEE ALSO:
• Help for Advisors in Advance of New IRA Rollover Requirements
• Rollover Reckoning: More Money Moving from 401ks to IRAs
• 4 in 10 Participants Don’t Understand 401k Fees—Or Know They Even Pay Them
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
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