Will rolling over my 401k into an IRA result in higher investment returns?

Will rolling over my 401k into an IRA result in higher investment returns?


Will rolling over my 401k into an IRA result in higher investment returns?


In general, no, your investment returns should be no different between the two retirement plans.  Both are simply tax deferred investment accounts. 

There could be a difference in fees, however, as a company 401k plan will sometimes have negotiated lower management fees on the mutual funds in the plan and the company may subsidize the administration fees that the 401k plan pays.  Larger companies often have the pricing power to get better terms for their retirement plans.  By the same token, sometimes companies pass on administrative fees to their employees so that the cost of the 401k plan could be higher than the IRA.  It depends on the specifics of the 401k plan you are leaving vs. the IRA you are planning to roll into.


Not necessarily.  However, it will almost certainly allow you to have more investment options, which logically could help you experience better investment performance.  However, there are no guarantees that it will improve your performance.  There are other considerations to weigh as well in making the decision to rollover or keep your 401(k) assets with your former employer that may be just as important.  Below are some of the pros and cons for each decision:

Pros for keeping your 401(k)

+ Some plans allow distributions at age 55

+ Some plans allow loans up to 50% of balance-though not recommended

+ Possibly better credit protection (but varies by state)

+ Rollover to another 401(k) at new employer may be allowed

Pros of Rollover IRA

+ Better control over investment choices and custodians

+ Beneficiary may be able to “stretch” distributions

+ May take early distributions with IRA 72(t) option

+ IRA’s can be consolidated into one account

Cons of Keeping your 401(k)

- Limited investment options more typically

- Employer may mandate rollover if no longer employed, or balance below a certain amount

- Unpaid loan balances could make taxes due of rolled over and loan not repaid in full within 60 days (considered distribution, and taxed at ordinary income rate, which could push you into a higher tax bracket)

- Generally higher administrative costs with 401(k) vs. IRAs

- May be penalties for rollover/withdrawal from plan for certain period of time if there are back end sales charges, also called Contingent Deferred Sales Charges (CDSC's)

Cons of Rollover IRA

- No loans from IRA's allowed - considered distribution

- May be tax problems if done incorrectly

- May not be creditor proof (but varies by state)


I would answer "most likely" and give three reasons why:

(1)  Most 401k plans over-weight U.S. equities, a flaw that falls into the category of "familiarity bias."  It is especially problematic when employees naively allocate equally to the funds offered.

(2)  Most 401k plans omit most asset classes other than equities and U.S. fixed income.  Real estate, MLPs, high yield, floating rate funds, foreign fixed income, preferred stocks... are some of the asset classes that 401k plans generally do not include.  Some do not even have emerging markets equity.

(3)  Most 401k plans do not offer advice to the plan participants, so individuals are left to choose their own asset allocations or opt for high-cost "lifestyle" portfolios.  It is rare that I meet a client whose 401k account is appropriately allocated and well-diversified.

If one agrees with the statement that asset allocation is the most important factor in determining investment returns, then each of these factors is  an independent reason to roll over plan balances whenever possible.  

I am aware of the argument that (some) 401k plans offer access to low-cost institutional share classes, but I have yet to encounter a situation where this benefit outweighs the other explicit and implicit costs of keeping money in the plan.  On the other hand, I have observed on many occasions that smaller companies have 401k plans that are terrible in multiple respects:  high fees, lousy funds, and poor diversification.

If short, by rolling over their accounts to an IRA, most people should be able to improve their investment performance --- increasing return for the same level of risk, or decreasing risk for the same level of return --- compared to their 401k investment options.  


Not any more than moving your wallet from you left pocket to your right pocket will increase the amount of money in it.

However,  having access to more investment instruments, professional advice, and paying closer attention to what is going on inside that account all have a good chance of improving your returns.

In my professional experience, rolling 401(k) funds into an IRA and integrating it into the overall plan benefits most investors over the long haul.


The short answer is No.  The 401k and the IRA are both accounts or arrangements which hold funds intended for retirement and have the same tax benefits.  But typically the 401k is more restrictive in the investment options since it is provided by your place of employment and usually limits your investment options.  For this reason the IRA may be a better option if you do not like the choices provided by your particular 401k.  One benefit of a 401k is that IRAs are not as well protected against lawsuits as are funds in a 401k.


Yes, you could earn better returns in an IRA than a 401k.  Here's why:

1. Lower costs - A 401(k) has administrative expenses that an IRA doesn't, and many of those expenses are often passed on to the participants. You won't incur many of these expenses in an IRA.

2. No proprietary funds.  Have you ever noticed that if your 401(k) is administered by John Hancock or Fidelity, there are a lot of John Hancock or Fidelity funds available?   That's because they aren't choosing the best of breed investments from the entire universe of funds, they're selecting funds from their own company.  Many fund companies have a 401(k) business just to push their own funds.  Not all plans do this, but the majority still do.  Look at your plan carefully to assess it.

3.  More effective investment strategies.  401(k) accounts typically have mutual funds and exchange traded funds - and some have annuities. While there are many funds available, you can invest in more advanced strategies to protect your downside in an IRA that aren't available in a 401(k). Structured notes and direct real estate ownership are two quick examples.  You can also structure your portfolio to have a better up capture ratio than a down capture ratio, providing higher compounded returns through all the ups and downs in the market.

If you take the exact same investments and move them from a 401(k) to an IRA, the only performance difference should be the higher administrative costs of the 401(k).  However, with a broader array of investment types and strategies available in an IRA it is possible to increase the potential returns.


It depends.   There are some employer plans that are very highly rated according to criteria set up by the 401k rating service Brightscope.  Check your plan rating on their website.  The advantages of keeping your 401k with your previous employer and not rolling them over are 

1.  you can roll or combine it with your current 401k for simplicity of management.  

2.  401k's have a higher protection standard against being sued as mentioned in another answer although IRA now have protection against creditors up to $1 million in California.

3.  The costs for investment management might be lower than an investment advisor's fee for assets under management if the 401k is using low cost index funds from providers such as Vanguard or Fidelity.  If your advisor is using actively managed mutual funds and charging an assets under management fee in addition costs for investment management at an RIA might be more expensive than the 401k.

4.  Fewer choices for investments making decisions and management easier.

5.  The new cost and expense disclosure rules have made the 401k, 403b and other defined contribution plans more transparent although the disclosure documents are often hard to understand for the plan participant.

Advantages of rolling into IRA

1.  More investment choices.

2.  Easier to integrate into the rest of your investment management portfolio.

3.  If you already have a traditional IRA it is easier to have assets managed under one umbrella instead of getting many statements.

4.  It is easier to convert traditional IRA assets to Roth IRA accounts.

5.  Easier to convert into inherited or "stretch" IRA for estate planning purposes.

As far as resulting in higher returns the main factor for higher returns in any account would be lower expenses.


While there is no guarantee, rolling over your 401(k) into an IRA should result in higher investment returns simply based on the investments available in each account.  Most 401(k) plans have a few dozen mutual funds to choose from and some offer limited asset classes to diversify into.  Investing in an IRA will give you access to tens of thousands of options including equities, specific sectors, and alternative investments that can increase your return and limit your downside.

The key to all of this is knowing what to do with these additional options.  The average investor
does not know how to properly allocate and monitor their portfolio so professional advice is recommended to take full advantage of what the IRA offers. 


Funds in an IRA will enable you to purchase individual high quality bonds. High quality bonds will return invested principal when the bonds come due. They will provide consist cash flow. If interest rates rise, you will be able to reinvest the cash flow at the higher rates. Rising interest rates are the upside for individual bonds.


I would say that probably almost all employer sponsored 401k plan have limited investment options. So if you have a 401(k) with the past employer and now eligible to roll it over into an IRA I would do it.

You will have more investment options with most IRAs. Also, you may want to consider establishing a Self-directed IRA. You will need to find a special custodian who will not limit your investment options at all and you will be able to invest in non-traditional or alternative investments such as real estate, precious metals, tax liens and tax deeds, mortgage notes, do hard money lending and much more. By having access to those investment options you will be able to achieve better diversification, greater control of your investments and generate better returns by investing in what you know and understand best.

If you are self employer, even better option will be self directed Solo 401k or Individual K. There are some amazing benefits this type of retirement plan offers such as eliminating custodian for good and saying goodbye to all custodian fees, ability to have checkbook control over your retirement account, virtually unlimited investment options, ability to shelter over $100,000 of your self-employment or business income as a family, access to your retirement dollars before you retire without taxes and penalties and more. This plan is truly the most powerful retirement investment vehicle! 


This depends, what are the fees and expenses inside of your current 401(k)? Get your funds holdings and check out the fees at Morningstar.com. Next, calculate what your MAR RATIO has been for your portfolio. What is the return adjusted for risk? (CAGR/Maximum Drawdown.)

Now, with this information, compare that to what your Individual IRA options are. Do you have a detailed risk-based money management plan to protect profits when the market goes south? Calculate those same ratios and compare.


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