Many Americans heading into retirement confront a weighty question that doesn’t have an easy answer: Should they retain their savings in their 401(k) plans, move them to an Individual Retirement Account (IRA), or cash out and pay taxes (and perhaps penalties) on the assets withdrawn?

A new research paper titled “The Pros and Cons of Remaining in a 401(k) Plan After Retirement” addresses this question, especially for “the vast majority of Americans who enter retirement with low or moderate levels of financial literacy.” The paper’s authors are Wharton professor of business economics and public policy Olivia S. Mitchell, who is also executive director of Wharton’s Pension Research Council; Catherine Reilly, a non-resident scholar at Georgetown University’s Center for Retirement Initiatives and Pension Research Council advisory board member, and John A. Turner, director of the Pension Policy Center in Washington, D.C.

According to the authors, many retirees are better off keeping their savings in 401(k) plans instead of moving them to IRAs, especially lower-income people with limited financial literacy. Although IRAs can offer retirees more advice and distribution options compared to most 401(k)s, there are ways that 401(k) plans can bridge that gap.

Rolling over to IRAs, however, “could be a sensible financial decision” for people whose employer plans charge high fees, the paper notes. Those tend to be small employer plans and thus they include relatively few people. Yet most people with low or moderate levels of financial literacy will do better financially by remaining in their employer 401(k) plans, the authors point out. One important reason is that 401(k) plans are more likely to provide retirees lower cost investment options, compared to IRA accounts, they explain.

Mitchell believes that the paper’s findings are important at the present time: “Over 11,200 Americans are turning age 65 per day between 2024 and 2027, meaning that those who have not yet retired are likely contemplating retirement in the next few years,” she says. “And many of these have accumulated retirement assets in their 401(k) accounts, which they can either roll over into an IRA that they then must manage, or else retain the funds in their employer-based plan.”

But choosing between 401(k) plans and IRAs isn’t the simplest of tasks. “This is a potentially costly moment, since few understand the costs and benefits of such rollovers,” Mitchell points out. “Our study examines who might be better off keeping their nest eggs in their employer-managed plans, so as to save money and benefit from the legal protections afforded by plan sponsors under the law.”

After Retirement: 401(k)s or IRAs?

The stakes in that challenge are large: Nearly two-thirds (64%) of private-sector employees (excluding agricultural workers, household workers, and the self-employed) have access to defined contribution (DC) plans, according to 2021 data from the Bureau of Labor Statistics.

Employer-sponsored DC plans can use their institutional bargaining power to provide their plan participants with better investment and decumulation options than those available from many IRAs, the paper states, citing a report from the Institutional Retirement Income Council.

“Our study examines who might be better off keeping their nest eggs in their employer-managed plan, so as to save money and benefit from the legal protections afforded by plan sponsors under the law.”— Olivia S. Mitchell

Moreover, the key decisionmaker in selecting retirement plan investment and payout options is the employer offering the 401(k) plan, Mitchell notes. Typically the firm is advised by consultants who help in plan design, and sometimes employees have input through an investment or employee benefits committee, she adds.

The analysis explores several key factors that retirees should consider when deciding where to park their savings. These include investment management and administrative fees, and how plan size impacts those fees. The plan participant’s level of financial literacy is also important, and whether they need financial advice when choosing between 401(k) plans and IRAs. The paper also delves into the major pros and cons of both IRAs and 401(k) plans. Finally, it explains how legislation and technology tools could help participants refine their choice technology.

The authors conclude that, compared to 401(k) plans, IRAs can offer better access to advice, easier account consolidation, and greater flexibility of withdrawals. This is especially true when some employers do not encourage retirees to remain in the 401(k) plan after retirement, while IRA providers actively market their services.

Even though most 401(k) plans are likely to charge retirees lower fees than IRAs, many people do roll their assets over to IRAs. In fact, Mitchell notes that just over half (54%) of retirees currently leave their retirement accounts with their former employers, with the remainder moving their money to IRAs, according to a 2021 survey.

Participants in both IRAs and 401(k) plans must pay investment management, administrative, and advisory fees. The investment fees are typically lower for 401(k) investors than for IRA investors. One explanation for this is that large 401(k) plans can often access low-cost institutional share classes or commingled investment trusts (CITs) which are not available to retail investors.

Relatively less information is available on 401(k) plan administrative fees, the paper notes; those fees cover asset custody, record keeping, and third-party administration. Many IRA providers do not charge administrative fees, preferring to earn their income from annual fees on the assets they manage. Low-cost robo-advisors are also available via online platforms. The majority of 401(k) participants are in large plans, which can benefit from economies of scale and so charge lower fees than small plans.

Plan participants’ account balances and their degree of financial literacy should also influence their rollover decisions. The more financially literate can construct low-cost portfolios for themselves in IRAs, while the less financially literate will need IRA advice. In most cases, financially unsophisticated participants and those with low account balances are likely to be better off staying put in their employer plans instead of rolling over to IRAs. Moreover, under U.S. pension law, employers providing retirement plans have a fiduciary duty to provide investment options in participants’ best interests.

Some plan sponsors may prefer that retirees remain in their employer-sponsored plans, to increase the size of the pool of investable funds, which may allow them to negotiate lower fees from retirement plan service providers.

Legislative Support for 401(k)s

Recent policy developments have made it easier for retirees to remain in their 401(k) plans, including safe harbors for offering annuities and regulatory guidance requiring that advisors and brokers act in clients’ best interest when considering a rollover from an employer’s plans to an IRA. Beginning in 2025, the Secure 2.0 Act will require companies with new 401(k) and 403(b) plans to automatically enroll their employees into these plans.

Asset managers and others in the retirement planning value chain are also partnering with technology providers to help retirees retain their savings in their 401(k) plans. Those efforts, however, are a work in progress. The authors note that “both 401(k) plans and IRAs must evolve if they are to provide better options for participants in the decumulation phase of life.” They also recommended that defined contribution (DC) plans could incorporate longevity risk pooling to help retirees manage their payouts. This, they add, could enable many DC plans to adopt an attractive feature of defined benefit (DB) plans, while avoiding employer liability as well as funding and portability problems.

Large investment managers like BlackRock are alive to the challenges retirees face. BlackRock chairman Larry Fink said in his recent 2024 letter to investors that “providing people what my parents built over time — a secure, well-earned retirement — is a much harder proposition than it was 30 years ago. And it’ll be a much harder proposition 30 years from now. People are living longer lives. They’ll need more money.”

All considered, the study’s authors believe that, in the long run, “retaining assets in employer plans after retirement could usher in a new era of collectively managed investment solutions for retirees.” This approach would help plan sponsors “put the pension back” into DC plans, they add. “Ultimately, and most importantly, this could yield better outcomes, more retirement confidence, and greater security for retirees.”