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Should You Roll Over Your 401(k)?

David Blanchett
Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The fiduciary rule has put a spotlight on 401(k) rollovers. I'm here today with David Blanchett. He is the head of retirement research at Morningstar Investment Management. We are going to look at some things to keep in mind in deciding if you should roll your 401(k) over into an IRA.

David, thanks for joining me.

David Blanchett: Thanks for having me.

Glaser: Let's start by talking a little bit about why the fiduciary rule would matter here. Why is there so much focus on 401(k) rollovers now?

Blanchett: Well, it's a big industry. I think there's something like $7 trillion in defined contribution plans, and so it's a very attractive place for assets for financial advisors. And I think in the past advisors were focused on figuring out how to capture rollovers without necessarily asking the question, does the rollover makes sense for the investor. This fiduciary rule changes the perspective from, does the recommendation, is it suitable, to is it in the best interest of the client to actually move out of the defined contribution plan.

Glaser: Let's look at some of the things that advisors or investors should keep in mind. You think the first is fees, that's an important one.

Blanchett: Right. So, I think, is having a comprehensive understanding of the benefits and costs to the investor for rolling out. And the big cost part of it is going to be the fees, the expenses. And there's different fees to think about. I think that there's pretty high fees in a lot of defined contribution plans. The average total plan cost for a 401(k) with $1 million in assets is about 2% of assets. Advisors charge about 1% on average as well. And so, looking at all the different fees and components is really important. It's usually one part of a much larger equation.

Glaser: Another important part are the investments that are available in a 401(k) versus in an IRA. How do you determine if the quality of the 401(k) is up to snuff?

Blanchett: Right. So, as I just mentioned, I think there's a lot of things to think about. And the next is going to be like investment quality. Within a defined contribution plan, you've got a list of available options. You've got target-date funds, large-cap, small-cap, etc. The advisor has a portfolio of maybe 10 to 12 mutual funds or ETFs. Understanding how good these funds are, is really important. I think it's tough for a lot of investors to figure out what that quality is. I work for Morningstar. I'm a big fan of the Analyst Ratings. I think it's a great way for investors to figure out, kind of using a single metric, how good are the investments both in my current plan as well as the advisor-recommended portfolio.

Glaser: The advisor is going to do probably more for you than you'd get out of a 401(k). How do you evaluate the value of that advice and how much that's worth paying for?

Blanchett: That to me is the next part of the equation. So, you've got a portfolio in your defined contribution. You've got a portfolio that the advisor recommends. But the question is, well, what else is he or she going to do. If you look at the suite of services that most advisors offer, portfolio management is one piece of a larger pie. And the other stuff is really, really important, which is what we call the value of services. And so, will this advisor help you better meet your goals by helping you save more, through behavioral coaching. All this is really important from our perspective in terms of figuring out, does it make sense to roll out of the plan where there might not be much advice available to an advisor where there's lots of possible advice solutions.

Glaser: Every investor is individual, has a unique situation. What are some of those unique factors that could swing one way or another from keeping it in the 401(k) to the rollover?

Blanchett: I think that to your point, it really is a personalized decision based upon your facts and circumstances. And so, I think a big thing is, if you work for a very large plan that has lots of available advice offerings, it might make more sense to stay. If you've got large economies of scale and lots of ways to kind of receive guidance, that's very attractive. If you're in a smaller plan that's very expensive with low-quality options, rolling out will likely make sense in most situations.

Glaser: So, no one-size-fits-all solution?

Blanchett: That's right.

Glaser: Well, thanks for joining me today.

Blanchett: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.