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Is Now the Time to Rollover a Retirement Plan Account to an IRA?

The Investment Flexibility of an IRA vs. a 401k Re-Examined in the Current Financial Market Environment

One of the major factors to consider when deciding whether to rollover a retirement plan account to an IRA is investment flexibility.  An IRA typically allows its owner almost unlimited investment flexibility.  In contrast, a 401k, 403b or 457 retirement plan account-holder is constrained to choose from among the menu of investment options made available by the plan's sponsor and service provider.

For the most part, you'll find that the U.S. equity market is well-represented in these investment lineups, with choices ranging from large- to small-cap stocks, and representing growth and value investing styles.  Bond, international stock, and alternative investment asset classes tend to be less well-represented, their presence offering the most basic level of diversification.

It's in this respect, though, that a retirement plan account often comes up short versus an IRA.  Most retirement plans don't offer targeted exposure to many asset classes or sectors that could well reduce risk or improve returns over the long term.  Examples of these include international and emerging markets bonds, commodities, high-yield bonds, bank loans, and international small-cap stocks.

The vast majority of retirement plan investment options are traditional open-ended mutual funds or close cousins of them, i.e. separately-managed accounts, collective investment trusts or annuity sub-accounts. Meanwhile, more attractive investment opportunities can often be found among closed-end mutual funds (CEF's) trading at substantial discounts to their net asset values.  This was especially the case as recently as December of 2018, when many CEF discounts were wider than they were during the dark days of 2008.

Furthermore, the exchange-traded funds (ETF's) and exchange-traded notes (ETN's) that can be bought in IRA's are providing investors with cost-effective access to many of the asset classes and sectors missing in most 401k's.  And in general, these exchange-traded products have much lower fund management expenses than can be found in most retirement plan line-ups.  This is especially important when expected future investment returns are low, i.e. when stock and bond valuations are high, as they are currently in the U.S. financial markets.

And finally, a whole new generation of exchange-traded funds offering "smart beta" approaches to investing may also be tapped for inclusion in an IRA.  It's still early days to pass judgment on the staying power of these new investment vehicles, but the academic research behind many of them is promising.

It follows then that when you are most worried about U.S. stock valuations, or about the potential for rising interest rates to damage your plain vanilla bond funds, that you should consider most strongly rolling over to an IRA to diversify away from these risks.


About the Author

Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT.  His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.  To contact Paul, please click here.