Protecting Your Nest Egg

It's many retirees' worst nightmare: losing their nest egg. This is exactly what happened to several Proctor & Gamble retirees who transferred their money out of their employer's retirement plan and into IRAs managed by an A.G. Edwards broker.

Unauthorized and unsuitable stock trading resulted in catastrophic investment losses for the retirees. The situation resulted in a settlement between A.G. Edwards and the state of Georgia, with A.G. Edwards agreeing to pay $27 million to 119 investors. The brokerage firm said the case was an isolated incident, involving a few unscrupulous brokers.

But the stark reality is that what happened to P&G retirees can happen to anyone, says Early Show financial advisor Ray Martin. As U.S. workers age and more workers approach retirement, more will consider rolling over their retirement savings from the relative safety of their employer's retirement plans into the unknown world of individual retirement accounts managed by brokers and investment advisors.

In fact, according to the Financial Research Corp. of Boston, an estimated $2.3 trillion will be rolled over from employer retirement plans into IRAs from 2003 to 2010. For many future retirees, their retirement savings will be the cornerstone of their financial security, as pensions and Social Security make up a much smaller portion of the retirement income they will need to get by.

When it's time to retire, how do you safeguard the money you've saved in your company's 401(K) or other retirement fund? Consider keeping your money in your company's plan. As long as you have over $5000 saved, the law says that you must be allowed to keep your savings in your employer's plan. If you have under $5000, the employer can ask you to roll that money into a different account.

This advice goes against conventional wisdom, which promotes rolling your savings over into an IRA. Many believe that IRAs provide more investment choices, more flexible withdrawal features, and better access to investment advice. While all of these things may be true, an employer's retirement plan offers many advantages that no IRA can match:

LOWER INVESTMENT EXPENSES: Every mutual fund has expenses. You have to pay for administration of the fund, call centers, management, etc. However, you will pay less - for the very same fund - if you are invested in it through your company. Why? Pure volume - there's power in numbers. Funds offer discounts to companies.

LOW ACCOUNT FEES: Employer plans do not charge low balance fees - in other words, there are no minimum balance requirements - and annual fees are lower. Also, unlike the typical IRA, there is no cost for transferring money into different funds.

COMPETITIVE INVESTMENT RETURNS: The idea of a guaranteed investment, a stable value fund, is attractive to older investors. Many employer plans offer these funds and their rates of return can be hard to match. For example, Boeing offers a fund with a yield of 4.7% - a rate that's almost impossible to find in a retail IRA.

CREDITOR PROTECTION: If you would ever have to file for bankruptcy, the money in your employer's retirement plan could not be touched. However, money in an IRA is fair game for creditors in most states.

FLEXIBLE WITHDRAWAL FEATURES: These days, your company's retirement plan may be as flexible as an IRA when it comes to withdrawing your savings, particularly if you're with a large employer. So increased flexibility is no longer an excuse to leave your 401(K) for an IRA. In other words, if I want to retire at 62 and want to receive an extra $1000 a month until Social Security kicks in at 65, your company may accommodate you.

INVESTMENT ADVISORY SERVICES: More than half of employer plan sponsors now hire advisors to provide investment advice. When an employer hires someone like this, the advisor is duty-bound to offer investment advice that is in the best interest of plan participants. The employer has a responsibility to monitor the advisor. In other words, you are almost guaranteed to receive good advice.

Compare this to the "advice" you get when investing through a broker. A broker is hired to represent the interests of his or her firm and can only recommend investments that the firm approves. Thus, you may not hear about the investments/funds that would be best for you. Adding to the confusion, many firms now label their brokers "financial advisors." Retirees need to remember that these folks are still brokers, and they are not obligated to work in your best interest.

For a list of the questions and information to request and review before handing over your retirement savings to a broker or advisor, see AARPs Financial Advisor Questionnaire. Link to it in the links section, to the right of this story.