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Retiring? You Probably Haven’t Thought of This.

Posted on January 24, 2014

When it comes to rolling over retirement accounts, a new government report suggests that job switchers are ignoring what may be their best option: Pouring savings into a new employer’s 401(k).

For many investors, the term “rollover” is synonymous with moving money from an employer-sponsored plan like a 401(k) into an individual retirement account. But it is also an option to move those assets sitting in an old 401(k)—or other defined-contribution plan like a 403(b)—into a similar plan at the new job.

New research from Congress’s investigative arm, the Government Accountability Office, suggests that paperwork hassles and a hard sell from IRA providers mean investors too frequently overlook the latter option. “It’s unnecessarily hard to do the right thing,” says Alison Borland, a retirement strategist at benefits company Aon Hewitt, which estimates that investors roll $9 into IRAs for every $1 that goes into a new 401(k).

Investing pros agree that cashing out retirement savings is almost never wise. But there are benefits to both of the other alternatives: IRAs typically offer a wider range of investment options, while 401(k) plans offer lower costs, particularly if they are sponsored by a big employer.

Those cost savings can be significant in the long run.

Retirement savers in retail mutual funds—the type widely available in IRAs—pay annual fees averaging $101 per $10,000 invested, roughly double what investors in big 401(k)s pay, according to investment consultant Callan. Such differences can compound into thousands of dollars in lost retirement income after decades of saving, according to Callan’s defined-contribution practice leader, Lori Lucas. “I don’t think participants really understand the cost advantages,” she says.

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