Rollover IRAs cost consumers $45.5 billion in fees, earnings: study

On Jun 30, 2022

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IRA rollovers are common for job switchers, retirees

Investors rolled $516.7 billion from workplace plans into traditional IRAs in 2018, the latest year for which data is available. That’s nearly 28 times more money than as contributed to traditional IRAs that year.

A Pew survey from 2021 found that 46% of recent retirees rolled at least some of their workplace retirement funds to an IRA, and 16% of near retirees plan to do so.

A rollover may not be optional, either: About 15% of 401(k) plans don’t allow workers to retain funds in the plan when they retire, according to a survey conducted by the Plan Sponsor Council of America, a trade group.

How much money rollover IRA fees may cost investors

The typical “hybrid” fund in a 401(k) plan is 0.19 percentage points cheaper than the same fund available to IRA investors, according to the Pew study. (A hybrid fund holds both stocks and bonds.)

That fee differential, which may seem negligible, amounts to big bucks over many years.

Using those figures, Pew estimates that investors who rolled over in 2018 would have collectively lost about $980 million in a year due to extra fees. Over 25 years, their nest eggs would be reduced by about $45.5 billion in aggregate due to fees and lost earnings, according to the analysis. That’s just from a single year’s worth of rollovers.

The typical fee differential in 401(k) plans versus IRAs is even larger for stock funds and bond funds — 0.34 and 0.31 percentage points, respectively.

Mutual fund share classes have different fees

Pew’s analysis examines fees according to mutual fund “share classes.”

Basically, the same fund can have multiple share classes that carry different fees, also called an “expense ratio.” They fall into two basic camps: “institutional” shares, which carry higher investment minimums and are generally available to employers and other institutions; and “retail” shares that carry lower minimums and are generally meant for individual investors.

Institutional shares generally have lower fees than retail shares.

The Pew study assumes a 401(k) saver invests in the institutional version of a mutual fund, while a rollover would be to the retail version of the fund. The study estimates how such a rollover might impact individual retirees in different circumstances.

In one example, a 65-year-old woman who retires with $250,000 in her 401(k) would end up with about $20,500 less in savings at age 90 due to higher IRA fund fees, given certain assumptions — a “significant loss for a person living on a fixed income,” the study said.

Those assumptions include: annual fees of 0.46% and 0.65% in a 401(k) and IRA, respectively; a 5% average annual rate of return; and account withdrawals of $1,000 a month to supplement Social Security benefits.

What to consider before you roll over retirement funds

When you’re deciding whether to leave assets in a workplace retirement plan or roll them into an IRA, there are many factors to consider:

Cost. Fees won’t…