I love the holidays. For me, Christmas is the chocolate time of the year- chocolate cakes, cookies, hot chocolate. It is awesome! I recently made my own Crock-pot hot chocolate and invited friends over to share my sugar rush.
As I was talking to them, I sensed a level of anxiety in the room. I asked them what was going on and found out that many of their companies had announced possible layoffs. One of my friends told me that if she was laid off, she would move her funds to her financial advisor. I asked her why. She gave several great reason- lower costs, increased investment options and having help with investment choices.
I told her that those are all good reasons. In fact, those were all the reasons I was taught to give when I first became an advisor. Later, I realized that rolling money out of a 401(k) is not always the best choice.
First, most 401(k) plans are cheaper on average than buying the same funds from a financial advisor. When a company is purchasing a 401(k) plan, they have the collective buying power of all the participating employees, which can help drive down the cost of the fund. Also, in most cases, you do not have to make an immediate decision so take your time. Do not let your advisor’s sense of urgency rush your decision making process.
Second, most 401(k) plans offer many choices and some offer a self-directed brokerage account, which may give you access to thousands of mutual funds. I, like many financial advisors, wasn’t trained to review someone’s 401(k) plan features before recommending they move their funds. However, a self-directed brokerage account can offer the same investment options as an IRA.
Third, the woman I was talking to was 56. If she was let go and needed her funds, she could access her funds from her 401(k) plan without paying a 10% penalty. This option goes away the second the funds hit the IRA rollover account. In my early years, I did not have the experience to evaluate the tax implications of rollovers and honestly, many advisors are not trained to ask.
Unfortunately, my friend lost her job the week after Thanksgiving. But thanks to our conversation, she did not feel pressured to make an immediate decision about her 401(k) plan. She now could evaluate all of her options and make the most well informed decision, which for her was to leave the funds where they were.
Many advisors are great. They really want to act in your best interest, but many are not trained and are not paid to holistically evaluate all the solutions, even those that they cannot get paid on. That’s why our CEO, Liz Davidson, wrote What Your Financial Advisor Isn’t Telling Youto help you make the most well-informed decisions about your finances. Unless you have a former financial advisor friend to discuss these issues with over chocolate, you might want to check it out.