When retiring, workers must decide what to do with their 401(k) balances, with choices ranging from leaving funds with a former employer to rolling them into an IRA. Each option carries distinct implications for fees, investment control, and retirement income sustainability.
- Average 401(k) fees range from 1.2% to 1.8%, significantly higher than low-cost IRA alternatives.
- A $500,000 401(k) could lose up to $150,000 over 20 years due to higher fees compared to a low-cost IRA.
- Traditional IRAs offer 100+ investment options versus 6–12 typical in employer 401(k) plans.
- RMDs begin at age 73 under current IRS rules for both 401(k)s and traditional IRAs.
- Rolling over funds within 60 days avoids tax penalties and maintains tax-deferred growth.
- Annuity options in 401(k)s carry additional fees averaging 0.75% annually.
Upon retirement, individuals who remain with their former employer’s 401(k) plan may face higher administrative costs and limited investment flexibility. On average, these plans charge annual expenses of 1.2% to 1.8%, compared to 0.3% or less in low-cost IRAs. This fee disparity can erode returns significantly over time—potentially reducing a $500,000 account balance by $150,000 or more over 20 years due to compounding costs. The decision hinges on several factors. Leaving funds in the employer-sponsored plan allows continued access to institutional investment options, which may include target-date funds or stable value funds. However, these plans often limit participant choice to a curated list of funds, typically ranging from 6 to 12 options, whereas IRAs offer hundreds of investment choices across stock, bond, and ETF categories. Tax implications are another critical consideration. Rolling over a 401(k) into a traditional IRA preserves tax-deferred growth, but early withdrawals before age 59½ incur a 10% penalty plus income tax. In contrast, Roth IRA conversions require upfront taxation but allow tax-free withdrawals in retirement. Retirees should also consider required minimum distributions (RMDs), which begin at age 73 under current IRS rules and apply to both 401(k)s and traditional IRAs. Market conditions and personal risk tolerance further influence decisions. During periods of market volatility, some retirees may prefer the stability of annuity options available through certain 401(k) plans, though these come with additional fees averaging 0.75% annually. Financial advisors recommend evaluating all options within 60 days of retirement to avoid unintended tax penalties and maximize long-term portfolio growth.