I have seen many plans that have been in place for a long time. Yet, their asset size fails to  reflect the time these plans have been in place. One of the primary reasons for this type of depletion is the rate that 401(k) money is rolled out to an IRA. Usually, the financial advisor on the plan convinces participants to roll their money to his/her broker dealer business. I have heard too many stories that variable annuities are usually sold to these participants after the transfer.

The ultimate goal of every participant is to maximize his/her contribution to their 401(k) and to have the company help with a Safe Harbor match or smaller contribution. 401(k), 403(b), and defined benefit plans are protected under ERISA – the full name is the Employee Retirement Income Security Act of 1974.

The importance of ERISA is the protection it affords to the participant. If a participant is sued or declares bankruptcy, the assets in the qualified plans are protected under ERISA. For IRAs there is limited protection within California, and it changes with new case law. Here is an article that helps explain the difference:

Los Angeles Times article  – IRAs Could Be Fair Game In Lawsuits

Assets in qualified plans should not be rolled out to IRAs for this reason, but there are additional ones that are as important.

401(k) plans have come down in price and so has the expense ratios that have been offered by these plans. One of the attraction of rolling out money from 401(k)s has been the selection of investments at a broker/dealer or a discount investment house. That reason has largely been mitigated due to some plan companies offering the same access to discount investment houses such as TD Ameritrade. Many participants do not take full advantage of these platforms since they are confused with the large selection, and the financial advisor on their 401(k) has no incentive to help since commissions on retirement plans do not pay as well as handling individual accounts.

I have seen many of these IRA assets buy annuities. There could not be a worse time to buy annuities since interest rates are at an all time low. Annuities claim to guarantee investors with 7% rates, but this could not be further from the truth. The annual cost of insurance eats over 50% of the return, and the 3.5% rate that is left is neither inflation adjusted for the future nor guaranteed if the insurance company fails. In addition, the 3.5% left is not tax-free but tax-deferred.

Advisors feed the fear of losing money to indviduals, and guide them to these types of products. The payout of these products are high for advisors, and that is one of the reasons for the high cost of insurance. Investing is about controlling risk, and you have to do your homework to find these types of assets. If you pay an advisor, it is their job and not yours.

Each state has a guaranty association that protects the annuity policyholder to a certain limit. I am sure the word “certain” was not communicated clearly to participants when buying these products. The term “guarantee” is filled with conflicts and confusion in annuities, and it is up to the buyer to read the fine print.

The next time an advisor of your 401(k) plan suggests that you roll it to an IRA think twice and do a little research.