Why IRAs beat out 401(k)s among older Americans

For most working Americans, the savings vehicle of choice is a 401(k).

But a flood of retirement savings dollars moving from these employersponsored plans to IRAs suggests that retirees or workers nearing the end of their careers favor individual retirement accounts when it’s time to tap the cash they’ve amassed.

Older Americans are driving the trend, shifting their savings to take advantage of IRAs’ more flexible withdrawal options, as well as some other perks that make the accounts more attractive than 401(k)s as people enter their golden years. These one-time savers need to start accessing the money to pay living expenses and to generate a steady income stream once they stop collecting a paycheck.

In the five years ended in 2017, 96 percent of the $2 trillion in IRA contributions came from rollovers, according to Cerulli Associates, a retirement consulting and research firm. And between the end of last year and 2022, the money invested in IRAs is expected to grow at a faster pace than

401(k)s, with IRA assets jumping 37 percent to $12.6 trillion. That compares to an estimated 20 percent rise in 401(k) assets to $6.6 trillion.

To be sure, the mushrooming assets in IRAs are due partly to the fact that for years Americans have been advised by brokerages, wealth management firms and financial advisers to take their money with them and move the money into an IRA when they leave a job or stop working. Many Americans also aren’t aware that they can keep their 401(k) even after leaving the company.

IRA assets are also rising rapidly because the account balances being rolled over are sizable, as most 401(k) accounts “represent a career’s worth of savings,” says Jessica Sclafani, director of retirement practice at Cerulli.

Last year, for example, nearly $200 billion in assets was rolled over from

401(k) plans to the IRAs of investors between the ages of 60 and 69, with an average rollover balance of nearly

$204,000, Cerulli data show. Americans older than 60 account for 70% of all IRA assets.

“They are big accounts,” Sclafani says.

Retirement plan experts cite key reasons why IRAs are a better place to hold retirement assets:

Having a sizable nest egg is one thing. Being able to get at your cash quickly and easily is another. On that

score, IRAs have the edge. “IRAs offer more flexible (withdrawal) options,” says Sclafani.

The most common distribution option at a 401(k) plan, for example, is a lump sum, which creates an all-ornothing choice for the account holder. Having to yank out all your money means it can’t keep growing in the account along with the market. IRAs, however, allow withdrawals at any time and in amounts the account holder chooses.

“401(k) participants are worried they won’t be able to access their savings, whereas IRAs don’t have those limitations,” says Sclafani.

More investment options

The average large 401(k) plan offers 29 investment options, according to a March study by BrightScope and the Investment Company Institute. By contrast, IRAs typically offer far more.

An investor, for example, that rolls over an account to an IRA at a mutual fund company, online brokerage or investment advisory firm will have hundreds, if not thousands, of funds to choose from. The menu will include a wider range of options, including stocks and bonds, as well as foreignbased investments.

“Some 401(k) plans may not offer more than one international fund, or may not offer international bond funds,” explains Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

More access to advice

IRAs set up at mutual fund firms such as Fidelity Investments, a discount brokerage such as Charles Schwab or a financial advisory firm in your hometown can give you access to professional investment advice. And that’s critical, as the so-called “drawdown” phase – or withdrawal years – is “far more complex” than the wealthbuilding years, Cerulli research shows. In fact, the firm’s research revealed that many people need guidance with “what to do with their proverbial ‘pile of money’ at retirement.”

Still, experts say don’t bolt from your 401(k) plan without reviewing the features of your employer’s plan, as it could fit your needs and could even offer perks unavailable in an IRA.

Jim Keenehan, senior consultant of retirement plans at AFS 401(k) Retirement Services, ticks off a few benefits of keeping your former employer’s 401(k):

Lower Costs

Often, the investment options within a 401(k) are cheaper. “Companies are able to pool employees’ money together to access lower-cost funds than their retail counterparts,” Keenehan say.

Less is more

Sure, having more funds to choose from in an IRA may sound appealing. But “too many options can be overwhelming,” he says. A menu of 20 funds offered in a 401(k), he argues, makes it easier for investors to build a portfolio with the right mix of assets.

Advice

“Don’t assume you can only get advice in an IRA,” Keenehan says. 401I(k) plan sponsors, he says, provide advice and guidance to employees.