We appreciate this WSJ article because it highlights the risks of higher fees and lower standards of care when rolling an old 401K over to an Individual Retirement Account (IRA). However, not surprisingly, the article misses one of the biggest risks of all... The exorbitant sales charges charged by many stock brokers.
While it is true that investment products offered via IRA's may be geared towards retail investors instead of the low institutional fee structure offered in many 401K plans. However, a far greater risk is the upfront and continuing sales charges charged by many stock brokers and financial advisors. For example, if you roll over an old 401K to an IRA with a stock broker, that stock broker may charge you a 5% sales charge up front. That is an enormous amount!
For example, if you rollover $100,000 to an IRA, not only will the broker take $5,000 of your money up front before you even know it (and you cannot get it back), but the value of that upfront charge is even more detrimental as you miss out on the compound growth of the $5,000 over time. Additionally, stock brokers also generally charge an additional 1/4 of 1% annual fee known as a 12b-1 fee (this amount is usually hidden from investors unless they read the very fine print). This 12b-1 sales charge fee also detracts from the long-term compound growth factor of your investments. And remember, compound growth is one of the most critical components of saving for retirement. Don't let an unscrupulous broker hamper you from day one!
At Blue Harbinger Research, we love index fund based passive strategies because they generally (not always) charge lower fees. In fact, we've created a "Lazy Person Portfolio" within out Blue Harbinger Stocks service that helps investors identify low cost exchange traded funds (ETFs) so they don't get taken to the cleaners by an unscrupulous advisor. And for those of you inclined, our Blue Harbinger 15 shows you how to construct an investment portfolio using individual stocks so you can maximize your long-term profits instead of maximizing the profits of your broker.