Often, when leaving a job, people want to roll over their 401(k) to an IRA. That’s because, according to the IRS, if the distribution from that retirement account is paid directly to another retirement plan, such as an IRA, no taxes will be withheld from your transfer.
You may think you’re saving money and pursuing a convenient solution, but there’s a catch. Some people may overlook the costs of rolling over a retirement account to an IRA.
401(k) Plans Offer Different Share Classes Than IRAs
According to Employee Fiduciary, 401(k) plans and IRAs offer mutual funds in different share classes: 401(k) plans typically offer institutional shares, while IRAs tend to offer retail shares.
There is a difference in cost between these two share classes. IRAs have the higher cost.
Employer-Sponsored Plans Have Institutional Shares
Institutional shares usually require a large initial investment. Often the minimum is in excess of $100,000. To meet this threshold, employer-sponsored plans pool workers’ contributions.
Institutional shares also typically have lower expenses.
Individual Investors Typically Have Retail Shares
Once you move to an IRA, you’ll typically have retail shares, which have a low minimum investment. This makes investing more accessible to those with small 401(k) balances. However, as a result, they have higher expenses than institutional shares.
Institutional Revenue Sharing
There is an exception to this that can make institutional shares more expensive than retail shares. According to Employee Fiduciary, revenue sharing is the practice of embedding administrative and recordkeeping fees inside a mutual fund’s operating expenses. A portion of the collected fees is paid to the plan’s service providers.
It’s important to know whether your 401(k) fund uses revenue sharing or pays direct fees. Direct fees must be explicitly disclosed in 408b-2 and 404a-5 fee disclosures, plan financials, and your statements. A revenue sharing fee can be estimated in 408b-2 disclosures or buried in the fund expense ratios in 404a-5 disclosures. These fees may not appear in plan financials or participant statements.
When considering a rollover to an IRA, factor in how your plan pays fees.
Hidden Costs to IRAs
When considering moving from a 401(k) plan to an IRA, compare the expense ratios of the funds in your current plan to where you would be investing through the IRA.
According to Davies Wealth Management, you should review the fund fact sheets, which clearly list the expense ratio. If, as mentioned, your employer plan offers index funds at low institutional pricing, that’s a benefit you’ll be leaving.
There may also be tax consequences if a rollover isn’t handled correctly. The most important distinction is to understand the difference between a direct rollover and an indirect rollover.
According to the IRS, in an indirect rollover, when the former employer sends you the check, they must withhold 20 percent for federal taxes. With a direct rollover, sometimes called a trustee-to-trustee transfer, the funds go directly from the 401 (k) to the IRA without you ever touching them.
The Rule of 55 and Early Access
Many early retirees are caught by the “Rule of 55.” According to the IRS, if you leave your employer in the year you turn 55 or later (age 50 for public safety employees), you can take penalty-free withdrawals from your employer’s 401(k) plan. You still must pay the 20 percent tax, but you won’t have the ten percent early distribution penalty.
However, if you roll over the 401(k) to an IRA, you have 60 days after rolling it over to take advantage of this distribution. After that, you cannot withdraw the funds without incurring a penalty until after you turn 59.5.
However, according to the IRS, there are some exceptions to the Rule of 55.
Loss of Creditor Protection
According to Davies Wealth Management, the Employee Retirement Income Security Act of 1974 (ERISA) provides unlimited protection from creditors for assets held in a 401(k) plan or any other employer-sponsored retirement plan.
The protections for an IRA are not identical to ERISA’s. Nuances may depend on your state of residence or the type of legal claim against you.
3 Types of Advisory Fees
Although pretty straightforward, one 401(k) rollover cost is the introduction of advisory fees.
Often an investor will begin working with a financial advisor, and there are three different ways that an advisor can charge for managing the account.
One is the Assets Under Management (AUM) fee.
With an AUM, an advisor charges fees based on the total value of your portfolio. According to Afton Advisors, most advisors charge an annual fee ranging from 0.25 to two percent of your portfolio’s value. For example, if your portfolio is worth $500,000 and your advisor charges a one percent fee, you’ll pay $5,000 annually.
You can find this fee information on your account statement.
Another way to pay a financial advisor is through commission. Commission-based accounts operate differently. Advisors earn money through commissions on mutual funds or other investment products.
The often preferred type of advisory charge is a flat fee. Flat-fee advisors charge a fixed dollar amount for their services regardless of portfolio size or product sales commissions. It is transparent, straightforward, and predictable.
Research IRAs Before Doing a Rollover
Although a 401(k) rollover to an IRA may be a good move for retirees, it’s not a decision to automatically make. There are hidden costs such as loss of institutional shares. There are also additional fees and possibly limited protection from creditors.
The Epoch Times copyright © 2026. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
