By Ellen Hoffman When you go to work for an employer, you gain not just a job but, often, a retirement account as well. You're stuck with the 401(k) or similar alternative that's offered, and there's no need or opportunity to shop around for more attractive investment options or services. But when you leave your job -- either for another one or because you're retiring -- the situation changes. Chances are you'll want to roll over the money accumulated in the 401(k) to an IRA that will probably become the most important source of your income throughout retirement. (For details on rollover rules and tax issues, go to the IRS's information page.)
Right now, rollover accounts are hot financial products. With baby boomers starting to retire and some $150 billion rolled out of retirement plans into IRAs in 2003 alone, according to Boston-based research firm Cerulli Associates, rollover IRAs are being marketed aggressively -- in financial magazines, on the Internet, and even in your mailbox. Here are some tips on the three most important things you need to consider when choosing an IRA to see you through your retirement.
WHERE TO INVEST? Are you most comfortable investing in relatively safe but low-paying certificates of deposit (CDs) or money markets? If so, your local bank may suffice. Like other bank deposits, your rollover IRA will be insured up to $100,000 by the federal government. According to Bankrate.com, which monitors rates, the average one-year CD currently pays a little more than 2%, and money market accounts pay less.
If you're willing to take a little more risk and want to spread your IRA resources among a few mutual funds, you might be best off getting an account with a fund group such as Vanguard or Fidelity, which should allow you to shift money among their funds with little or no charge. For an account of $100,000 or more, Patrick L. Doland, a financial advisor in Northbrook, Ill., suggests tapping "a broader selection of funds and other investment opportunities" by opening an account at a "supermarket," preferably a discount broker such as Charles Schwab (SCH) or T.D. Waterhouse. He likes the discount houses for their combination of lower fees and broad choice.
Although Doland does not recommend investing retirement savings in individual stocks, discount brokers -- or full-service ones, such as Morgan Stanley -- would also offer that option. If you're an active investor, your choice of a home for your IRA might also depend on whether you already have or want to have a close relationship to a personal investment adviser.
VARYING COSTS. "Anyone who's shopping to move a 401(k) should identify three or four options, then do a thorough analysis so they're sure they understand the fees," Doland recommends. This is more complicated than it sounds. One cost component is fees for services, such as opening or closing an account or account maintenance, and these vary widely.
For example, BB&T Investments charges an annual custodial fee of $35 a year for an IRA and $75 to close the account. An IRA that's invested only in Vanguard's mutual funds can be opened and closed without charge if the account is worth $5,000 or more, and the annual custodial fee is $10. T.D. Waterhouse charges a $25 annual maintenance fee for accounts under $25,000. If you want Fidelity to actively manage an IRA account worth $50,000 to $200,000, you'll pay a fee of 1.1% each year.
Rick Miller, a financial planner in Cambridge, Mass., notes that if you have several IRAs, you're probably paying more service charges than necessary. So when planning a rollover, be sure to take stock of all the IRA's you've set up, and consolidate them as much as possible.
If you trade stocks and bonds, the second cost component will be transaction fees. If you hold mutual funds, as many retirees do, it will be the funds' expenses you need to pay attention to. Miller offers this example of why you need to be aware of funds' expense ratios before you buy: A $50,000 investment in an index fund, held for 20 years, with an annual return of 8%, will yield $225,000 if the expense ratio is 20 basis points (0.2%). If the expense ratio is 100 basis points, the total after 20 years will be only $193,000 -- a difference of $32,000.
CHECK OUT SERVICES. When you retire, you'll probably be making regular withdrawals from this IRA, so easy access to information and good service may be more important than before. Online account management is a great tool for keeping track of balances and withdrawals. You may also want to know that informative and friendly telephone backup is available seven days a week, or that there's actually an office with a human being you can visit and talk to close to your home.
One way to check up on the phone backup is do your research by phone and be sure to ask a lot of questions. If you're satisfied with the kinds of answers you get, you may have found a home for your money.
Other service features to consider relate to the withdrawal process and to estate planning. When it's time to take Required Minimum Distributions at age 70 1/2, will you have to do the calculations, or will the financial-services company do them for you? Will they send you a check or deposit the money in your checking account? Finally, Doland notes that larger companies are usually better set up and more willing than small ones to handle final distribution of an IRA that has not just one but several beneficiaries.
Financial planning for retirement is inevitably fraught with tough decisions of all kinds, and researching a home for your IRA may seem like just another hassle. But as Miller points out, "If the IRA represents most of your retirement assets, this is a very important decision" that you can't afford to make lightly. In addition to writing Your Retirement for BusinessWeek Online, Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. You can contact her through her Web site, www.retirementcatchup.com