Money Watch: Pay to have your 401(k) managed?
- Combining retirement plans into one is easier to manage
- At age 70 1/2 you must withdraw a required minimum distribution
- If you don't follow the RMD rules you'll be hit with a penalty
MoneyWatch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisors answering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: cdugas@usatoday.com.
Q: My wife wants to consolidate her 401(k) plans so that she only has one account to deal with. Is there any benefit to doing that? A company offered to consolidate them for free if we allow them to manage her retirement savings. But there would be a 1% to 2% annual fee for having the account managed. Is there any reason to do it?
A: Moving multiple 401(k) accounts into one account will, indeed, be easier. There will be one statement to review, one account to rebalance and a single place from which to take the required minimum distributions. If she is still employed it may be possible to move the other plans to the current employer's 401(k) plan. Check first and then consider the choice and cost of funds offered at the employer.
Participants of 401(k) plans now receive fee disclosure documents. And 401(k) plans are now beginning to offer lower-cost mutual funds in the plans. Many people have not realized that 401(k) plan mutual funds have fees associated with them. And the higher the fees, the lower the total return of the fund.
Upon reaching 70½, your wife will be required to withdraw a minimum amount every year from her tax-deferred retirement account, an IRA or 401(k) plan, and pay taxes on the amount withdrawn. If she runs afoul of the rules, she can be hit with a penalty of 50% of the amount that she should have withdrawn.
Typically, retirement plan providers will offer tools or calculators or even an annual estimate of the required withdrawal. IRS Publication 590 also has instructions on calculating the withdrawal amount.
Many people start by taking the distribution from the worst-performing investments. But if she doesn't want spend much time going over her investments, an adviser can assist in choosing the appropriate holding to use for the withdrawal. Shares can be transferred to a taxable account, so the original holding does not need to be sold.
There is a benefit to having someone else manage your wife's retirement account. It takes time to research which assets to use, how many, and how often to rebalance them. If she does not feel that she wants to make changes to the account or monitor it over time, then professional management may be the answer.
The manager should be a professional who has her best interests in mind, chooses account holdings based on her tolerance for risk, and takes the time to explain the process being used.
It is prudent to speak with several managers whose fees and services differ. Comparing them will allow her to make an informed decision. Don't feel uncomfortable asking questions. Fees should be reasonable; those over 1.25% need to be justified. Fees are higher for a balance less than $1 million and decrease for assets greater than that.
Among things to ask: What services does the fee include? If the manager is using mutual funds, will a commission be charged on these, or are they no-load funds?
Load funds (those with a commission) cost more than no-load funds. This additional cost needs to be considered, as the higher cost will ultimately affect the total return the investor receives from the fund.
Katherine Holden,NAPFA-Registered Financial Advisor
Holden Financial Planning, Wayne, Pa.
Read previous Money Watch columns:
Making your retirement nest egg last
How to earn more as CD matures
Avoid tax penalties with 401k withdrawals
Are health care funds a smart investment?
Should I put all my assets in 1 brokerage firm?
Retiring home downsizer wonders where to park his money