IRA Rollovers Cost Americans Billions in Extra Fees, Study Finds – Here’s How to Protect Your Retirement Savings

retirement plan portfolio on top of vintage stock certificates.
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Financial fees tied to your retirement accounts might seem small at first glance, but if you build up enough over time, they can cost you thousands of dollars. That’s been the case with many Americans who transferred their 401(k) plans to individual retirement accounts through IRA rollovers, according to a new study from The Pew Charitable Trusts.

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The study, published on Thursday, found that investors rolled over $516.7 billion from workplace retirement plans into IRAs in 2018, the most recent year data are available. Pew estimates that workers who rolled money into IRAs in 2018 would have collectively paid $45.5 billion in extra fees over 25 years.

“Thousands of dollars in savings can be lost over time because of what may seem like modest differences in fees between funds or between types of shares within a fund,” the report said.

The reason has to do with the nature of mutual funds, which charge different fees depending on the type of investor. As Pew pointed out, shares held by individual “retail” investors pay much higher fees than institutional investors because the latter can leverage their purchasing power.

An analysis of fee differences shows that the routine shifting of billions of dollars each year from 401(k)s into IRAs — in which individuals frequently purchase retail shares — can translate into “significantly higher costs for retail investors….that can eat into their long-term savings significantly,” the report said.

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“Even small disparities in fees can lead to big reductions in savings,” John Scott, who directs Pew’s retirement savings project, told CNBC.

A typical “hybrid” fund (which holds both stocks and bonds) in a 401(k) plan is 0.19 percentage points cheaper than the same fund available to IRA investors, the Pew study found. That looks like a tiny difference on the surface, but over time it can add up to a big pile of money.

Pew researchers used the example of a recent retiree with $250,000 in a 401(k) plan, who had to decide whether to keep the money there or roll it over into an IRA. According to Pew’s analysis, over the course of 25 years, the retiree would amass $37,091 in fees by rolling it over into an IRA and $27,233 in fees by keeping it in the 401(k)’s mutual fund — a difference of about $10,000.

A separate Pew survey from 2021 found that 46% of recent retirees rolled at least some of their workplace retirement funds into an IRA, CNBC reported, and 16% of those nearing retirement plan to do so. Some rollovers aren’t optional, either: About 15% of 401(k) plans don’t allow workers to retain funds in the plan when they retire, according to the Plan Sponsor Council of America.

Before rolling over your retirement funds into an IRA, there are things you should consider to protect your investments. For one thing, it might be better to just leave your money in your 401(k) if that is an option — especially if you’re happy with its performance. Just keep in mind that your investment options in a 401(k) are limited to those selected by your employer and plan administrator. You’ll typically have more choices with an IRA.

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You should also be aware that IRA fees aren’t always higher than those in a 401(k). If you decide to roll your account over into an IRA, look for funds with equal or lower expenses relative to your 401(k) funds.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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