Financial planning: What to do with the rollover decision

By Nathan T. Kauffman, Hefren-Tillotson Inc.

In 1981, the IRS issued proposed regulations on Section 401(k) that officially sanctioned pre-tax salary reductions. Thirty years later, the term 401(k) has become synonymous with retirement savings.

Over time, participation in these and other similar defined-contribution plans has increased substantially. Today, employer-provided retirement plans often represent the bulk of an investor’s retirement savings.

At various times in their lives, participants in these types of plans have the opportunity to remove assets from the plan while retaining many of the tax benefits. This transfer process is often termed a “rollover.”

Changes in employment, such as retirement or employment with a new company, often lead individuals to consider transferring their assets to an IRA. Other investors are sometimes able to use a lesser-known technique known as an inservice withdrawal to transfer all or a portion of their retirement plan assets to an IRA even while they remain an active participant in their employer-provided plan.

Regardless of the timing of the transfer, many individuals choose to roll assets to an IRA because of the benefits to the investor. Two of the most common reasons individuals decide to utilize an IRA for retirement plan assets are the increased investment options that are available and professional advice.

A common fault of employer provided retirement plans is that the investment options are limited and may not be the most appropriate for the investor. When utilizing an IRA, the greatly expanded investment options can make a significant difference.

From January 1, 2001, to December 31, 2010, the S&P 500 Index dropped from 1320.28 to 1257.64. If the funds in an employer-sponsored plan consisted of index funds, or other poorly performing mutual funds, participants had a difficult time finding decent returns over that 10-year period. The expanded investment options in an IRA could have provided a significant benefit.

Many retirement plan participants find navigating the various options in the employer-provided plan difficult enough; therefore, expanded investment options may not provide much of a benefit without the benefit of an investment adviser. When utilizing an IRA, an investor can team up with an investment professional to help provide timely advice.

For example, in early 2009, in the midst of one of the worst U.S. market declines, Hefren-Tillotson advised many of its clients to add high-yield bond exposure. It came at a time where many investors were considering moving assets to a money market or other fixed-dollar assets like certificates of deposit for security. The recommendation proved to be timely, valuable advice. As a category, high-yield bonds rose 58.2 percent in 2009.

Timely advice does not always result in these types of returns; however, an investment adviser can provide helpful perspective and objectivity to the investor. Employer-provided retirement plans typically do not provide that type of advice to participants and often lack the necessary investment options for timely implementation of such recommendations.

There can be situations where transferring retirement plan assets to an IRA would not be wise. One such example would be for some individuals between the ages of 55 and 59. Under certain circumstances, the IRS permits penalty-free distributions from an employer-provided retirement plan that are not available from an IRA. Transferring to an IRA could ultimately result in adverse tax consequences for such an individual.

The decision whether or not to move assets from an employer-provided plan to an IRA is unique to each individual investor. Anyone considering a rollover should discuss it with a knowledgeable adviser and make certain that they understand all the implications of doing so. When all factors are properly considered, the rollover can provide tremendous opportunities to the investor.

Nathan T. Kauffman is a Certified Financial Planner™ practitioner and a financial adviser with Hefren-Tillotson Inc., a full-service brokerage firm offering comprehensive financial planning, investment advisory services and wealth management. He is located in Hefren-Tillotson’s South Hills office and can be reached at (412) 833-5777.

0 comments

All comments will be reviewed by administrators and posted to their respective articles within 24 hours. Comments deemed inappropriate will not be posted.

Subject:
Body:
Poster:

Enter text seen above: