401(k) Rollovers to an IRA: Fees, Risks, and Mistakes to Avoid

Millions of people transfer money from their workplace retirement plans to their personal retirement accounts every year, and mistakes can be costly and irreversible.

Federal law allows tax-free “rollovers” for a variety of reasons, including when changing jobs or retiring.

As baby boomers move into retirement, rollovers have become more common, a so-called “gray tsunami.”

Investors put $682 billion into IRAs in 2023, more than triple the amount in the early 2000s, according to the latest available Internal Revenue Service data. Nearly 6 million people rolled over their funds in 2023, up from about 4 million in the same period.

Nearly half of all new “traditional” IRAs (pre-tax IRAs) were opened in 2020 with only funds rolled over from 401(k)-type workplace plans, according to a January paper by University of Michigan Stone Center Inequality Dynamics Researcher Asher Doville Djerassi.

On August 12, the IRS issued guidance to “simplify, standardize, expedite and expedite” rollovers, which can be a cumbersome process in some cases.

Financial advisors say there are also pitfalls awaiting investors.

Ellen Lander, founder of Pearl River, New York-based Renaissance Benefit Advisors Group, said there are “pros and cons” to choosing between rolling over money and keeping it in a 401(k) plan. “My biggest concern is that I don’t think they’re being discussed enough.”

Advisers say potential risks include tax penalties and higher investment fees, among other things, which could leave investors losing their nest egg.

The CFP Standards Board, the organization that oversees the certification of certified financial planners, issued a rollover guide on August 19 that explains some of the potential traps.

It dispels two “myths”: that workers must roll over their assets when changing jobs, and that investors can reverse their decisions later.

In fact, rollover may not be necessary. Most 401(k) plans allow investors to keep their funds in their former employer’s 401(k) plan.

But data shows that very few do. In about 77% of 401(k) plans, fewer than half of retirees keep their assets in their employer’s plan, according to the Plan Sponsor Council of America, an industry group.

Regarding the second myth, the CFP Board’s guide states that the decision to roll over funds from a 401(k) to an IRA may be “irrevocable.”

In most cases, “you can’t go back to where you were,” says Brenton Harrison, a Nashville-based certified financial planner.

One outlier is the Thrift Savings Plan for federal employees, according to the CFP Board’s guide. The plan allows former federal employees to put money into the program, but there are some caveats. For example, rollovers from Roth IRAs are not accepted and employees must have a confirmed balance of at least $200 in a Thrift Savings Plan.

Investors who change jobs can typically roll their IRA or old 401(k) account into their new employer’s workplace plan.

According to financial advisors, there are some additional considerations regarding rollovers for investors.

Yes, you pay fees on mutual funds, exchange-traded funds, workplace retirement plans, and other investments in your IRA.

These fees may not be immediately apparent because the fund manager automatically deducts them from your account, rather than making you pay them directly.

Financial advisors say these fees are often higher for IRAs than for employer-sponsored retirement plans.

This is primarily because employers who sponsor 401(k) plans can leverage the collective purchasing power of their employees to buy cheaper mutual funds in the “institutional” stock class, the advisers said. IRA investors don’t have that buying power and typically have access to higher-cost “retail” stocks in the same mutual fund.

“You go from being an institutional buyer to being a retail buyer,” Lander said.

A 2022 analysis by the Pew Charitable Trusts, a nonpartisan research group, found that in 2019, the median annual fee for retail stocks in equity mutual funds was 0.34 percentage points higher than the annual fee for institutional stocks, a difference of 37 percentage points.

Investors end up losing money on these losing fees compounding investments, which can have a “significant impact” on nest egg growth, Lander said.

According to a Pew study, investors who retired in 2018 and moved their funds into IRAs would have a total savings of about $45.5 billion over a hypothetical 25-year retirement period due to the difference in fees.

The Securities and Exchange Commission has an example of the long-term dollar impact of fees. Assume an initial investment of $100,000 and a return of 4% per year for 20 years.

According to the SEC, investors who pay a 0.25% annual fee and investors who pay a 1% annual fee will earn about $30,000 more after 20 years: $208,000 and $179,000.

Of course, this is not always true. Certain 401(k) plans may include funds that have higher fees than comparable funds that investors can find in an IRA.

There are different types of flexibility, for example with respect to investments and withdrawals.

For one, you have more investment options to choose from with an IRA compared to a 401(k).

Employers select a limited roster of investment funds for investors in 401(k)-type plans. About 69% of 401(k) plans offered 25 or fewer funds in 2025, according to the Plan Sponsor Council of America (PSCA).

Of course, having more options isn’t necessarily a good thing. For example, too many options can lead to choice paralysis, advisers said.

Having a curated list of investments “relieves the self-management burden” for investors, Harrison said.

Advisers say employers also have a legal obligation, known as a fiduciary duty, to choose investments in 401(k) plans that are in the best interests of their workers.

Keep in mind that financial intermediaries who recommend transferring money from your 401(k) into certain IRA investments may not have a fiduciary duty and therefore may not have your best interests at heart, advisors say.

Investors who want a financial advisor to manage their assets may need to roll their funds into an IRA to allow for that discretionary management. Investors who choose to keep their funds in a 401(k) can receive advice on how to best invest the funds themselves. You must execute trades on your own with the guidance of an advisor.

401(k) investors may have limited withdrawal options during retirement compared to IRA investors.

For example, only 52% of 401(k) plans allow monthly or quarterly installments in 2025, according to the PSCA report. It found that 68% of plans offer regular or partial withdrawals and 13% offer annuities.

Many 401(k) plans allow investors to take out loans, but “you can’t borrow from an IRA,” Lander said.