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Wall Street has done a remarkably thorough job of brainwashing investors into rolling their old 401(k) accounts into individual retirement accounts.

IRA rollovers are certainly a better option than cashing out, which is the worst thing you can do with a 401(k) account other than not fund it in the first place. But moving money from a workplace retirement plan to an IRA when you switch jobs or retire can be a really lousy idea.

鈥淚n most cases, it鈥檚 not the best decision for retirement investors,鈥� says investor protection expert Micah Hauptman, who serves as financial services counsel at the Consumer Federation of America. 鈥淏ut rollovers are a huge profit source for all financial services firms.鈥�

Here鈥檚 what those financial firms are telling you, and why you should think twice before listening:

鈥淵ou鈥檒l have more investment options.鈥澛�Yes, and you鈥檒l likely pay more for them 鈥� at least 30% more, based on asset-weighted averages for stock funds inside 401(k)s versus outside. The gap may be even wider, since large-company 401(k) plans typically have access to ultra-cheap institutional funds.

鈥淵ou can consolidate your accounts.鈥�聽Yes, you don鈥檛 want to leave old 401(k) accounts scattered behind you as you leap from job to job to job. You鈥檒l likely pay too much in fees, and it鈥檚 hard to coordinate investments across multiple accounts. But if your current employer鈥檚 plan accepts transfers 鈥� and many do 鈥� that may be a better option than an IRA rollover.

鈥淵ou鈥檒l have more control.鈥�聽Yes, if you鈥檙e a sophisticated investor with a nuanced understanding of asset allocation, more control can be a good thing. But you may just be a good target for a sales pitch. Your friendly financial services firm could steer your IRA investments toward high-commission options such as mutual funds with sales fees, variable annuities and nontraded real estate investment trusts.

Investments that come with such built-in conflicts of interest make up more than 20% of assets held in IRAs, according to the White House Council of Economic Advisors. People who receive conflicted advice when rolling over 401(k) balances to IRAs at retirement could run out of money five years earlier than those who don鈥檛, the economists said.

Financial services companies don鈥檛 have to put your interests first 鈥� at least not yet (more on that in a moment). Your 401(k) plan sponsor, on the other hand, does have the fiduciary obligation to act solely in the best interest of plan participants and their beneficiaries. So you may not have as many investment options, but they鈥檙e likely to be better choices than whatever happens to pay your broker the highest commission the week that you roll your money over.

When a rollover is the right choice

Sometimes plan sponsors don鈥檛 do their jobs, of course, and it could be that your 401(k) plan stinks. Small-company plans are notorious for their limited options and high costs. Here鈥檚 when you should think about bolting:

All your investment options cost 1% or more.聽The average total expense ratio for stock funds in 401(k) plans has dropped to 0.54%, so if you鈥檙e paying a lot more than that, it may be time to move on. (You can analyze your plan鈥檚 fees with聽, powered by FeeX.)

You can鈥檛 (or don鈥檛 want to) transfer to your new employer鈥檚 plan.聽If the new plan isn鈥檛 any better, it doesn鈥檛 accept transfers or just doesn鈥檛 exist 鈥� many companies don鈥檛 offer 401(k)s 鈥� then a rollover to an IRA could be a reasonable choice as long as you pick a low-cost option. That could be a discount brokerage with an array of low-fee funds, or a robo-advisor, many of which can manage your money for a total cost of 0.5% or even less. Check out 鈥�.鈥�

鈥淎sk for a side-by-side comparison showing the all-in cost of the proposed IRA investments versus the current 401(k) costs,鈥� says Jeanie Schwarz, a personal financial planner at NerdWallet. 鈥淎 rollover may be a better option, but the consumer should get all the facts and ask for a fee comparison.鈥�

What a rollover can cost you

Before you pull the trigger on an IRA rollover, though, you need to understand the other disadvantages, which are numerous:

• No loans.聽You can鈥檛 borrow from your IRA for more than 60 days once a year without incurring taxes and penalties. If you can roll your old 401(k) into your new employer鈥檚 plan, though, you typically can take out loans and pay yourself back.
• No early access.聽You normally can鈥檛 tap your IRA before age 59陆 without penalty, but money can be taken from 401(k)s penalty-free starting at age 55 if you leave your job.
• Less creditor protection.聽Your 401(k) has unlimited protection in bankruptcy court and against creditors鈥� claims. Your IRA鈥檚 bankruptcy exemption tops out at $1,283,025, and protection from creditors鈥� claims varies by state. In my state of California, for example, only amounts 鈥渘ecessary for support鈥� are exempted, which could be a lot less than the balance you鈥檝e accrued. Most people won鈥檛 get sued or butt up against these limits, but if you鈥檙e a big saver or live in California, Georgia, Maine, Mississippi, Nebraska and Wyoming 鈥� or ever wind up living there 鈥� you should understand the risks. (Those states don鈥檛 offer full protection to traditional IRAs, including rollovers. Some states don鈥檛 offer full or any protection for Roth IRAs, including Maine, Mississippi, Montana, Nebraska, West Virginia and Wyoming.)
• A huge tax trap with company stock.聽Roll your company stock over into an IRA, and you鈥檙e giving up a big potential tax break since withdrawals will be taxed as ordinary income. If you instead transfer your company shares to a taxable account when you leave your job, you鈥檒l owe income tax on the stocks鈥� original cost, but any subsequent growth can get favorable long-term capital gains treatment. The rest of your 401(k) can be rolled into another employer鈥檚 401(k) or to an IRA. Ask your tax pro how to take advantage of this 鈥渘et unrealized appreciation,鈥� or NUA, feature.
• A chance to put off required minimum distributions. IRA money has to start coming out of your account after you turn 70陆. If you鈥檙e still working at that age, though, you don鈥檛 have to begin distributions from your current employer鈥檚 401(k) plan until you actually retire.

You may not hear about these disadvantages if you turn to a financial services firm for advice. Three years ago the U.S. Government Accountability Office mystery-shopped financial service call centers and found one-third immediately launched into a pitch about聽why rollovers were the right choice.

鈥淲ithin 10 to 15 seconds, you have the call center representative trying to convince the caller [to roll over a retirement account] without any knowledge about the financial situation,鈥� Hauptman says.

You can hear some of the pitches on聽.

By聽the way, if you decide you鈥檝e made a mistake with a previous IRA rollover, you may have a 鈥渄o over鈥� option. Some employer 401(k) plans accept transfers from IRAs in addition to transfers from other employer鈥檚 plans, Schwarz says.

Clock ticks toward a big change

IRA rollovers aren鈥檛 just big business for Wall Street 鈥� they鈥檙e huge business. Most of the $7.6 trillion held in IRAs comes from rollovers, according to the Investment Company Institute. The amount rolled into IRAs in 2013 was nearly 13 times the amount contributed directly, according to the Employee Benefits Research Institute, and an earlier ICI study found that more than 90% of funds going into IRAs came from rollovers. More than $400 billion a year is rolling into IRAs from company plans every year as the baby boomers begin to retire, according to research firm Cerulli Associates.

Which is why Wall Street is really nervous about the Department of Labor鈥檚聽聽for retirement money. Starting in April 2017, advisors are supposed to start putting clients鈥� interests first when counseling them about retirement funds, including rollovers. Imagine a time when advisors are forced to tell people the truth about the costs and disadvantages of a rollover.

Financial services firms can imagine exactly that. Which is why they鈥檙e likely to make a full-court press for your money in coming months.

鈥淭hey have a new incentive to recommend rollovers that may not be in the best interests of the client,鈥� Hauptman says. 鈥淚 would expect to see an uptick in rollovers before the rule goes into effect.鈥�

Liz Weston is a columnist at NerdWallet, a personal finance website, and author of 鈥淵our Credit Score.鈥� Email:聽lweston@nerdwallet.com. Twitter:聽.

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