Everything You Need to Know About 401(k) Rollovers

401k rollover

Don’t Fall for An All-Too-Common Lie of Omission About Your Options

Today I’m going to touch on a topic that arose due to a new client and motivated me to bring this conversation to our readers. As you know, at Davidson Capital Management, investor education is a priority. The topic of 401(k) rollovers is particularly pertinent if you’re a year or less from retirement and you’ve been saving in an employee-sponsored 401(k), and we want to make sure you aren’t falling for a common lie of omission that can negatively impact your retirement nest egg.

Our New Client and His 401(k) Rollover Dilemma

Here’s a little bit of background on our new client, who we’ll call Jim. He’s a long-time 401(k) participant at the major corporation where he works, and his 401(k) is “managed” by a large, name-brand brokerage firm. Jim told me how, over the years, there would be periodic retirement planning seminars offered at his workplace where the local brokerage affiliated with the 401(k) manager would come out and discuss the importance of rolling over your assets and working with their firm when you retired. Essentially, these seminars were nothing more than sales pitches meant to retain assets being rolled out of the 401(k) their firm “managed”, but which left out a lot of important information.

Is there anything wrong with a brokerage firm using a relationship-building mechanism like a retirement seminar to promote asset retention in their program? On its face, no. But what was unique in this situation was that this 401(k) offered a self-directed brokerage option, which you usually see only with a large corporation like we’re talking about. It allows a plan participant like Jim to work with an outside asset management firm – such as a brokerage firm or a Registered Investment Advisor (RIA) like us – to actively manage their retirement assets as they’re working and continuing to build their nest egg. But with that said, we have noticed over the last few years, the number of 401(k) plan providers allowing outside firms to actively manage self-directed brokerage accounts within 401(k)s is shrinking.

Jim attended many of these seminars over the years and what he told us was that he always got the impression from the brokerage firm presenters that if you’re getting ready to retire from this company, your only option is to rollover your assets to them to maintain and manage. Many of Jim’s colleagues felt the same because this was the only direction these presenters were saying people could take. The sales pitch was one-sided and very well-honed.


SEE ALSO: 6 Benefits of Working with A Registered Investment Advisor

The Lesson You Should Take from This 401(k) Rollover Scenario

Whenever someone tries to tell you, as the manager of a 401(k) program, that you only have one single option for your assets, you better bet that you don’t! You need to do your due diligence to investigate the other choices out there for you because you most certainly have other options.

Now, would a brokerage firm playing this kind of game make it easy to move your assets out of their company? Most likely not. That was the case here with Jim, and with some of his colleagues we had worked with over the years as well. This organization made it so onerous for employees to roll over their assets outside their chosen brokerage firm that most people who realized they had other options still chose not to pursue them! They would see all the hoops the brokerage firm was making them jump through and say to themselves, “Well, I’ll just leave my assets where it is.” The brokerage firm designed the perfect trap to retain assets.

Unfortunately, this would likely have been the most dangerous option for Jim or any of his colleagues. We know this because we got on Google, just like anyone can do, and we did a broker check on the Financial Industry Regulatory Authority (FINRA) website. This is a really helpful tool that any consumer can use to check a broker’s record on things like any past misdemeanors or felonies, bankruptcy filings, and customer complaints or disputes.

Low and behold, this group that gave the presentation to Jim had three customer complaints with accusations of fraud, account churning, improper asset allocations, and misrepresentations, and they had paid restitution to the tune of $575,000 over the course of their business. This is certainly not the group of people I would want to entrust my retirement nest egg too! Would you?

All of this was concerning enough, but we started digging deeper into Jim’s 401(k). He has a very conservative nature and tends to be very nervous about the market, yet Jim and his wife – who had assets with this group outside of his 401(k) – were sitting 96% in equities! Plus, the broker was charging over 3% in management fees to do what they were doing with these self-directed accounts being “managed” at this firm. Portfolio performance was horrible, the broker was doing way too much trading to generate additional commissions, plus they were charging high annual management fees. Essentially, they were rubbing salt in a wound and then pouring vinegar and alcohol on it.


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What To Do if You’re Less than a Year from Retirement

Why am I relating Jim’s whole story to you? It’s simple: I want you to know that YOU have control over your assets, and you shouldn’t let anyone tell you otherwise.

If you’re in a 401(k) plan and you’re past 59 ½, you have the option to take what’s called an in-service rollover distribution. You roll the balance of your 401(k) into a self-directed IRA, which is not a taxable event, and then you work with a fiduciary investment manager who uses discretionary control to actively manage your assets while you’re continuing to work and participate in the 401(k). It’s like you’re starting back at zero in your 401(k) and it can be a great idea if you’re nervous about managing your retirement nest egg on your own. You can hire a Registered Investment Advisory firm like us, and don’t let any company coming in to do a “pre-retirement seminar” tell you anything different.

Your money is yours, and you have every right to make sure it’s being managed properly. You have the ultimate control and the ultimate choices.

If you’re in a situation like Jim’s and you’d like guidance from a Registered Investment Advisor (RIA) in San Antonio or the surrounding area, give us a call today. At Davidson Capital Management, we don’t play games with your money to serve our own interests. Instead, we offer transparent, in-house investment management based on your best interests. We explain all the options open to you and provide guidance designed to help you meet your personal retirement planning goals. What are you waiting for? Let’s start a conversation about your financial future today.