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To avoid shock waves from retiree rollover boom, use caution

A Bloomberg article that just hit the wires this week sheds light on phenomenon that San Diego readers may be only somewhat familiar with. It's called America's retirement rollover boom -- the growing practice of people shifting their 401(k) funds into other plans such as individual retirement accounts as they leave the workforce and enter retirement.

According to one research firm cited by the article, retirees moved $321 billion from 401(k)-style accounts into IRAs in 2012. That reflects a 60 percent increase in rollover volumes from a decade ago. Based on that, it's estimated that IRAs now enjoy $6.5 trillion in assets while 401(k)-type accounts carry slightly less than that. The implication is that the gap is only going to widen as the number of retirees grows.

It must be noted that there is nothing wrong with rollovers. What the article seeks to convey is that consumers could be steered by unscrupulous advisors into rolling funds over into high-commission IRAs featuring risky investments. The advisor is sure to make a bundle, while the investor risks suffering investment losses.

If that happens, wisdom dictates contacting an attorney to explore options for seeking recovery. But ahead of that, here are some thoughts on prevention from a Chicago-based financial planner.

  • Know all your rollover options: If you are retiring or leaving to take another position, learn what you can do with your existing 401(k) funds. Maybe you can keep them where they are. Alternatively, you might be able to roll the money into a 401(k) with your new employer -- or an IRA. If you choose to take the cash, know what the tax implications might be.
  • Know your advisor: Do you know his or her background? How does the person advising you make money? Do they get a flat fee or a commission based on a percentage of what you roll over? Are they up front about the structures?
  • Know where your money will be going: Certain financial products carry higher risk than others. If you don't know what the differences are, ask. If you haven't gauged your risk tolerance level, it's time to do that so you can be sure your placing your funds into products you're comfortable with.  

Attention to these steps could save you a load of disappointment and money. 

Source: Bloomberg, "Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers," John Hechinger, June 17, 2014
Source: The Chicago Financial Planner, "401(k) Rollovers – Buyer Beware," Roger Wohlner, June 17, 2014

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