Retirement savers using IRA and 403(b) accounts tend to pay higher fees than those stashing their nest egg in a 401(k), according to a new Government Accountability Office (GAO) report. 403(b) and IRA participants are more likely to invest in products such as variable annuities and retail mutual funds, which frequently charge more than other investments. They also have less bargaining power to negotiate for lower costs.
[See Rethinking 401(k) Rollovers.]
401(k) plan sponsors frequently pool participants’ assets to negotiate reduced fees on investments. Single IRA investors generally pay higher retail costs because account balances are typically too low to be eligible for the volume discounts employers are able to arrange. And many sponsors of 403(b) plans, which are typically public schools and tax-exempt organizations, may not have the resources to hire retirement plan specialists as administrators who know how to reduce participant fees, GAO found. For many state and local governments, 403(b) plans are a supplementary account to a traditional pension, so employers are not always motivated to play an active role in managing 403(b) plans. 401(k) plans also sometimes offer bundled arrangements for fees, which can mean lower costs for participants. Employers that hire a single service provider for all administrative services may pay a single fee for record-keeping, legal services, and accounting, while sponsors that have unbundled arrangements may be charged separate fees for each service.
[Check out these 5 Ways to Protect Your 401(k) if You're Laid Off.]
Investment choices obviously play a role in the fees retirement savers pay. 401(k) account holders are more likely to invest in institutional mutual funds or group annuity products, rather than the more expensive retail mutual funds or individual annuities IRA and 403(b) account holders prefer, GAO found. IRA and 403(b) account holders are also more likely to purchase high-cost variable annuity products than 401(k) participants. Variable annuities generally have higher fees than other products because, in addition to investment costs, consumers are charged fees associated with the insurance portion of the product to cover the cost of providing guaranteed payments and minimum death benefits.
[Find out why Employers Can Override Your 401(k) Investment Choices.]
Employees need to carefully consider whether to roll over a 401(k) balance into an IRA when they leave a job. Some individuals moving their assets from a 401(k) plan into an IRA experience an increase in investment fees. But not every 401(k) plan is the best deal either. Some 401(k) plan sponsors offer optional features that increase fees, such as the ability to take out a 401(k) loan or convert a 401(k) balance into a retirement annuity, GAO found. The extra administrative costs of these features can be passed on to participants.
Check out these 7 tips before rolling over your nest egg from a 401(k) to an IRA.