Coasting in Retirement Ep 26: What Should You Do with Your 401k When You Retire?
Episode 26: What Should You Do with Your 401k When You Retire?
Segment 1 (Show Open):
Good afternoon, everyone! Welcome in. Welcome to Coasting in Retirement! That’s. Right. Thanks for joining us today, we’re excited to have you! Josh Null here, joined by the one and only Michelle Lee Melton, the Bonnie to my Clyde, the Jules to my Vincent…Michelle, how are you doing? We’ll I’m glad to be back in College’s recording studio, beautiful downtown Fairhope, kicking off our first show of 2024.
Listeners: Michelle and I are here today to discuss financial topics relevant to those of you in or near retirement living your best life along our part of the gulf coast. Here’s what we’ve got in store for you today: First segment – deep dive on our topic of the day. 2nd segment - at about 20 minutes past the hour - fan favorite, “Michelle with the News of the Week”. 3rd segment, roughly 40 minutes past the hour,” Josh’s Crystal Ball and…(Michelle:) Big Mouth”. That’s right, big mouth. So buckle up, we’ve got a lot to get to!
Quick background on me for those new to the show. Again, my name is Josh Null, I am a fee-based financial advisor, I hold my FINRA Series 65 securities license, and I am the owner of Gulf Coast Financial Advisors, an independent investment management and financial planning firm with offices in Fairhope and Orange Beach, Alabama. You can find more information on me and Gulf Coast Financial Advisors by visiting our website gulfcoastfa.com, or feel free to give us a call at 251-327-2124. If you missed that, don’t worry, we will repeat our contact info several times throughout the show!
Our topic today is something just about anyone that is close to retirement or recently retired has asked themselves: what should I do with my 401k or 403b? Should I leave it where it’s at? Should I roll it into an IRA? If so, what type of IRA? What’s the upside of doing a rollover? What’s the downside? What if I have several 401k accounts? These are all great and relevant questions that I’m sure many of you listening have asked yourself at times, and to help this episode stick in your brain, we’re going to use the letter “C” to help us answer those questions today. “C” as in a whole lot of words that begin with the letter “C”: costs, control, consolidation, coordination, convenience, conversion, contributions, etc., that are important to the choices you make.
Before we get to our C words a quick note that some investors miss - unless your 401k plan specifies otherwise, you don’t have to do a rollover into an IRA. You can always leave the money where it’s at, or you can possibly transfer into your current employer’s 401k plan, or you could cash it out, or you could look at what we are discussing today, doing a rollover into an IRA, either self-directed or managed by an advisor. I want to also note to the listeners that we do open and manage 401k plans and IRA’s at Gulf Coast Financial Advisors, so we’ve got experience on both sides of the aisle. What we’re going to discuss today is the different aspects of each type of account you want to consider when making this decisions, and in an effort to keep Michelle engaged in what can be a dry topic, I’m going to relate everything to one of her favorite things to collect: shoes.
So, Michelle, if you had to guess, how many pairs of shoes do you own? And you’ve had some of these shoes for years, right? Good.
So let’s start with our first C word of the day as it relates to an investor’s decision to keep their money in a 401k or do an IRA rollover in retirement: Costs. Michelle, if you have the ability to buy an identical pair of shoes from 2 sources, but one is cheaper, in a vacuum, which will you choose? OK. We will discuss why it’s not always apples to apples when comparing 401k plan costs to an IRA, but one of the first things you want to look at is the cost of your 401k or 403b plan compared to your IRA costs, particularly those of you looking to have an advisor like me to manage your IRA. Historically, the difference between the costs of a “normal” 401k compared to an IRA were not that drastic, but that has changed, particularly over the past 20 years - there is no doubt that plan fees have declined over that time period and continue to do so as industry consolidation has resulted in more plans and assets managed by fewer and larger entities. Think Empower, Fidelity, John Hancock, and the like.
But even with reduced 401k fees, you will still have some, so what are some of those costs and how do you find those? Most 401k plans have record keeper fees, administration fees, Third Party Administrator fees, and if there is an advisor affiliated with the plan, advisor fees. These are the fees that have had downward pressure over the last several years, but remember, typically it’s the participants that carry the load of these fees, which means, again, you probably have some level of cost associated with your 401k. There’s typically also expense ratios inside the investments you hold in your 401k. Locating the fees can be somewhat of a pain, but the best places to look are Participant fee disclosures, Plan-sponsor fee disclosures, Form 5500, which is the IRS filing form, and Summary Plan Descriptions.
401k plans are not the only investment accounts that have seen what’s called fee compression. IRA fees have also been reduced or eliminated by competition in the industry, so while you definitely want to make sure you understand any account opening fees, maintenance or trading fees, typically the biggest fee associated with an IRA rollover is the fee paid to a financial advisor like me. A lot of the nickel and dime fees associated with IRAs have been eliminated by competition, many would credit a custodian I use called Charles Schwab. Advisor fees are typically charged as a percentage of your overall account balance, range broadly, and usually decrease with larger account balances, but an industry general rule of thumb to remember is that a lot of accounts have about a 1% advisor fee. For example, on $1M at 1% annual advisory fee, you will pay $10k annually for the advisor fee.
Which leads us to our next shoe example. So Michelle, I give you the option to buy 2 pairs of identical running shoes. One pair is $50 and the other is $100. Based on this limited data, which do you choose? OK. But wait – let’s see if this changes your decision. What if the $50 pair only came in black, and you really really really wanted blue, but there’s no way to change this because the company has to offer the exact same color all of it’s other buyers – would you choose a color you don’t want to save money? What if you could get the $100 pair in any color you wanted?
That leads us to Control – something I’ll expand to say - care, custody and control. The great thing about qualified retirement plans such as a 401k is that it has to treat all of its participants exactly the same, with some provisions we’ll discuss on another episode. The sometimes-frustrating thing about qualified retirement plans such as a 401k is that it has to treat all of its participants exactly the same. When you bought your investments in your 401k plan, whether you knew it or not, you were selecting from a pre-determined menu, and generally speaking, a menu with limited choices. In an IRA, typically, you have many more options to choose from – typically the available investment options numbers in the thousands. In Michelle’s shoe example, maybe she was able to find a black running shoe that was acceptable to her, but want she really wants now is control over her shoe color, she wants the ability to buy blue shoes, or red, or whatever, and for many of you near or in retirement, your needs and wants have changed too - you may need and/or want a wider variety of choices, and more importantly, having the ability to make these decisions without concern about other investors is one of the key features of an IRA over a 401k or 403b.
All right, let’s talk about our next C word: consolidation. And I’m totally setting Michelle up with this one because, well, I happen to personally know her shoe storage situation. Michelle, let’s say that you have shoes spread out all over your house – in your master bedroom closet, on the back of the bedroom door, in your spare room closet, on the back of the spare room door. You’ve probably got a stash somewhere I don’t even know about. If you had the choice to keep all of your shoes in one location – say a huge custom master closet with floor to ceiling shoe racks – would you prefer this over having shoes spread throughout the house? Right.
Now, this scenario applies to investors that have a handful of 401k plans from their various places of employment. Many people don’t know that you can roll as many different 401k plans as you like into a qualifying IRA, as long as you make sure to match pre-tax with pre-tax with the account types.
Why does consolidation matter? We’ll, another C word comes into play – convenience. It can be a pain in the butt to have several different accounts with different websites, account statements, and lord help us all, different passwords to remember. Not to mention the convenience of requesting trades, account changes, re-balancing, etc. Plus 401k plans tend to be paperwork heavy. But looking past the convenience aspects and getting back to consolidation, when you have several different accounts, it can be very difficult to determine which accounts to take distributions from in retirement as well as which accounts are invested per your time horizon, risk tolerance and investment goals. Unless you have sophisticated financial planning software, it’s hard to determine your total investment mix. One appealing thing about IRA’s is that you can see and manage it all in one place. Just like if Michelle’s shoes were all in one closet.
There are more C words we could explain but I think the listener gets the idea. The decision to do a rollover or not always comes down to the needs of the individual investor, and there are certainly pros and cons with either direction you go, but if you take the time to consider these factors, whatever decision you make will help you sleep better at night and worry less about your money. We can help with this process, and we commit to only making a recommendation that is in your best interest, even if that means we don’t get the business. If you would like to have conversation about your existing 401k plan or plans, or maybe you’ve already got IRA’s in place and could use some guidance, then give us a call at 251-327-2124 for a no obligation, no pressure, no BS conversation, or find us at gulfcoastfa.com. That’s gulfcoastfa.com.
Alright folks, coming up next - There’s always a lot going on in the world! Particularly the world of finance, investments and money. Every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Join us after the break to hear Michelle and I discuss this week’s relevant headlines in our “Michelle with the News of the Week” segment. Stay tuned!
Segment 2 - Michelle with the News of the Week:
Josh: “Welcome back to Coasting in Retirement, your host Josh Null here! As we discussed before the break, every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Our job is to help you all understand how these headlines impact you, especially when it comes to your money! We also include the articles links on our show transcript, which you can find on our website gulfcoastfa.com under the podcast tab. So, without further adieu, here’s “Michelle with the news of the week!”:
1. Michelle: Alright Josh, let’s get started with a site that is geared more towards financial professionals than retail investors, but nonetheless has a fresh off the press article that applies to your topic of the day. WealthManagement.com’s article is titled “Can 401(k) Plan Fees Fall to Zero?” This article does have a little “inside baseball” nerd feel but I found a couple of numbers jumped out at me. First, did you know that there $9.3 Trillion dollars in retirement plans, and that an estimated $800 billion of that is expected to be rolled out into other accounts, presumably IRAs? Did you also know that because of recent tax mandates and credits that the number of 401k plans is supposed to increase by 50% in the next 9 years? This article touches on a lot of the fee discussion we had in the show opener so I’m going to turn it over to you to give your thoughts.
Josh:. So there’s a couple of meta changes that have been happening in the 401k space for several years. We discussed fee compression, where record keepers, TPA’s and advisor’s have to lower their fees to be competitive, especially with larger plans. With margins being squeezed on the basic 401k plan fees, there has been a pivot to what is called “participant services”, that is, tailored services for 401k plan participants. You all may have seen this, for example, some plans offer financial wellness training on top of the typically 401k plan service. Another big change that applies to both the 401k world and the IRA world is the shift from broker’s to fee-based and fee-only advisors that manage these plans in a fiduciary capacity. Lastly, one more meta change that’s been going on for years but was accelerated by some of the legislation born of the Covid era is that the government has tried to make more attractive to employers to offer a 401k plan, for a variety of reasons but probably most associated with taking future pressure off of social security. Now, will all these fees ever go to zero? Maybe, but I don’t think that will happen anytime soon, unless you have one of the big AI focused companies come in and try to electronically squeeze out any middle men or women. The main thing that both employers and plan participants need to pay attention to is that their plan is competitive and priced appropriately compared to other plans of similar sizes. You find this information by doing what’s called a “benchmarking” exercise, it basically tells you how your plan stacks up against other similar plans, it can be done completely confidential, and it’s one of the services we offer at Gulf Coast Financial Advisors, 251-327-2124.
https://www.wealthmanagement.com/rpa/can-401k-plan-fees-fall-zero
2. Michelle: Next up, our friends from the Fool, Motley Fool that is. They have an article titled “4 Signs You Have a Bad 401(k) Plan and What You Can Do About It”. This article relates back to our shoe discussion in the opening segment. For example, one sign you have a bad 401k plan is high fees, or costs, which would be me paying more for certain shoes when I can get the exact same pair somewhere else. Another sign of a bad 401k is limited investment choices, which means a lack of control. The Fool also talks about a long vesting period and no employer match, so my main question to you is, in a world where these plans are so regulated, how are some 401k plans still allowed to be substandard?
Josh: Well this comes back to benchmarking too. I obviously go after new business, Michelle, and while we have a pretty good record of success in attaining new business, sometimes we swing and miss. Here’s a typical scenario – a business owner has a friend in the investment management space that opens a 401k for them. Not that the advisor or broker necessarily overcharged their business owner friend, but what a lot of business owner’s forget is that there is a fiduciary responsibility to the plan participants, and if they haven’t benchmarked their plan in the last 3 years, there could be some red flags emerge under an audit. We’ve talked about fee compression over the past 20 years but it’s really accelerated over the past 5 years, so if you haven’t taken a competitive look at your plan anytime recently, there’s a good chance you’re out of compliance, and more importantly, you and your employees are probably paying more than you should for your 401k plan. Benchmarking sounds like a long, onerious process, but typically it’s not, you give the basic plan info to an advisor and they to do a blind comparison test to other similar plans, then give you the results. We offer benchmarking at GCFA because it’s an opportunity to show the plan sponsor our skills, and often the results are very enlightening, and here’s the thing – even if you don’t switch the plan over to us, we give you the information you need to go back to the negotiating table with your current record keeper, TPA and advisor. If you want to start that process, give us a call at 251-327-2124 or send a message thru our website gulfcoastfa.com.
https://www.fool.com/retirement/2019/02/16/4-signs-you-have-a-bad-401k-plan-and-what-you-can.aspx
3. Michelle: Next article is from the smart alecs at Smart Asset titled “5 Retirement Rollover Mistakes to Avoid”. So I’ve grown familiar enough with the different rules around retirement accounts to know that if your 401k plan sends you a check for a rollover, you have up to 60 days to deposit it into an IRA or you’ll owe income taxers, plus we’ve discussed many times that the account types have to match – if you’re rolling over a pre-tax 401k, it has to go into a pre-tax traditional IRA. What I didn’t know was that there are different rules for people age 55 to 59 ½ or that there was a difference between direct and indirect rollovers. What seems like a relatively simple thing to do – roll your 401k into an IRA – can get really screwed up if handled improperly. Care to elaborate?
Josh: One of the things this article mentions is something we occasionally see is a plan participant choosing an indirect rollover vs a direct rollover. More often than not you want to choose the direct rollover option if it’s available. Why is that? Well, when you request an indirect rollover, your employer is required by the IRS to withhold 20% of the balance for taxes even if you’re planning to complete the transfer within 60 days. You also have to replace the amount that was withheld when you finalize the rollover; otherwise, the IRS treats it as a taxable event. Choosing a direct rollover instead simplifies the process and allows you to sidestep a double tax whammy.
You also mentioned that different rules apply at age 55, and what that means is that if you leave your job and your retirement account stays with your employer, you can still take distributions without paying the 10% early withdrawal penalty. When you roll the money over into an IRA or another qualified plan, you lose this advantage. Now for a lot of people that don’t plan on touching their 401k account until well into retirement, this is not a big deal, but those of you fortunate enough to retire early, this is something that needs to be taken into consideration, and something we help investors navigate at Gulf Coast Financial Advisors, 251-327-2124.
https://smartasset.com/retirement/5-retirement-rollover-mistakes-to-avoid
4. Michelle: Last one Josh. This article is both another good use of the odd number 5 and a reminder of an episode we did back in August of 2023 called “The Good, Bad & Ugly of Roth Conversions”, which listeners can find on your website or on Spotify. Anywhoo, the article is found on Forbes and is titled “5 Ways a Roth IRA Can Ruin Your Retirement”. I had a couple of takeaways. First, it makes total sense that if you do a Roth Conversion of a pre-tax account and pay all or most of the taxes due up front, you need to have enough of a time horizon for your investments to make up the amount of money paid in taxes. Second, no taxes are withheld on your Roth IRA distributions, because the taxes have already been paid, people sometimes take too many cookies out of the cookie jar and deplete their Roth IRA account prematurely. I know Roth Conversions are something you handle with lots of due diligence, so what say you about this article?
https://www.forbes.com/sites/chriscarosa/2019/05/02/5-ways-a-roth-ira-can-ruin-your-retirement/?sh=63398abf61f1
Josh: Michelle, great job as always with the headlines, these are all important pieces of information that impacts those in or near retirement! Listeners – if you have questions around the topics in our headlines of the week, or questions related to your investment strategy or financial plan, why don’t you give us a call at 251-327-2124 to have a conversation or set up an appointment, or you can reach out to use via our contact page on our website gulfcoastfa.com.
Alright folks, coming up next : Josh’s Crystal Ball and Big Mouth. What have been some of my predictions? Have I been right? Was I ever wrong? How wrong? What do I think is going to affect investors in the near future? We talk about all of these things and poke a little fun at my big mouth. Stay tuned!
Segment 3 – Josh’s Crystal Ball and Big Mouth:
Welcome back! Your host Josh Null here, along side co-host Michelle. So, I am opinionated, I have strong opinions at times, I would say a radio show host that isn’t probably wouldn’t be very interesting to listen to. And I am paid in my profession to offer professional guidance and opinions to my clients, otherwise what use am I? Sometimes I feel so strongly about something that I talk about it publicly, on the various podcasts and radio shows I’ve had, sometimes I’ll even make predictions, and while I usually proved right, there are times I swing and I miss. Want to hear me eat a little crow? Then let’s get at with Josh’s Crystal Ball and Big Mouth. Alright Michelle, what’s first?
1. Michelle: So, Josh, I think it’s been fair to say that the more research and reporting we’ve done on cryptocurrency for the show, the more critical we’ve both become, especially you. So wouldn’t you know it that your financial fairy godmother decided to give you a birthday present, with the SEC approving rule changes that resulted in the greenlighting of 11 different “Spot” Bitcoin ETFs on January 10th, which is your actual birthday. Apparently nearly $3 billion has flooded into these funds since then. So, does this change your opinion on crypto - what’s your big mouth got to say about bitcoin now?
Josh: No. Talk about what this may do to the exchanges, FTX, Coinbase, lower fees, BUT, still no way for those in or near retirement unless it’s play money, there is no underlying value: no use case, no currency value, no revenue, no well know products, etc. Explain how this reminds you of the Dutch Tulip mania, dot.com and Beanie Babies all rolled up into one.
https://www.fastcompany.com/91012760/bitcoin-etfs-2-billion-first-three-days-trading#:~:text=Collective%20flows%20to%20the%20nine,days%20after%20its%202004%20launch.
2. Michelle: Alright Josh, you’ve often said that if someone has the know-how and desire to manage their own investments, they should give it a shot versus hiring a broker or advisor, but they needed to be very careful in how they set up and manage their accounts, particularly any IRA’s. Ss we discussed in the opening our news headline segment, there are several potential pitfalls for making mistakes in a 401k to IRA rollover, and that’s even when an investor gets professional guidance, so I think it should come as no surprise that the SEC issued an Investor Alert this past year regarding Self-Directed IRAs and the risk of fraud. And lookee here, it even has a section about cryptocurrencies, surprise, surprise. Anywhoo, given the complexity and potential fraud, do you still hold that there’s nothing wrong with the DIY investing crowd?
Josh: talk about potential miscues and tax consequences, custodial issues, ability to hold alternative investments that may not have much disclosure or liquidity, etc
https://www.sec.gov/investor/alerts/sdira
3. Michelle: Last one Josh, you’ve stated that investors would be mildly surprised if they knew how old the average advisor is in your industry, financial advising, investment management and financial planning, but that they would be shocked if they new how few advisors have a succession plan in place. Add to this that the number of new advisors coming into the industry, with a recent report on Fox Business that claims your industry actually declined by 50,000 members since 2021, from 330,000 to 280,000. I bring this up to put a little shine on you because, while you may be considered middle age by general population statistics, at your age you’re almost a shiny new penny among your financial advisor peers. What’s your crystal ball got to say about the aging out of your industry, and what this means for investors?
Josh: age is not a bad thing, I’ll take experience and cunning over youth and enthusiasm anyday, and this work usually isn’t physically demanding, so you can do it for a long time. Discuss why you think there is a lack of new participants, or more specifically, how so many promising people start out in meat grinder shops that run them into the ground with no pay, often with more experienced advisors waiting on the sidelines to scoop up whatever clients the quitting advisor leaves behind.
https://www.foxbusiness.com/economy/americas-aging-population-shows-importance-succession-planning-financial-advisers-clients
Well listeners, I hoped you enjoyed a peak behind the curtain on how I form my opinions and predictions, and more importantly, that I’m willing to admit when I am wrong. Which isn’t very often, but still. Now, to our listeners that have more questions the various investments and topics we discussed in this segment, we invite you to reach out to us. Call us anytime at 251-327-2124 to make an appointment or find us at on our website at gulfcoastfa.com.
Folks, that’s it for us this week here at Coasting in Retirement! I want to give a huge thank you to my lovely co-host, Michelle Lee Melton, a thank you to our awesome radio station 106.5, many thanks to the provider of our show music, local band Sloth Racer, and as always my sincere appreciation for all of your out there that have been listening and joining us on this journey. We would love to be a part of your journey as well. Until we talk again next Sunday, have a wonderful and productive week. This has been Coasting in Retirement with Josh Null!
Disclosure:
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management ("PCWM") and Qualified Plan Advisors (“QPA”). Certain services may be provided by PCIA affiliates. In this format, Josh Null provides general information, not individually targeted personalized advice, and is not liable for the usage of the information provided. Exposure to ideas and financial vehicles should not be considered investment advice or a recommendation to buy or sell any of these financial vehicles. This information should also not be considered tax or legal advice. Past performance is not a guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.