Existing Relationships Drive Choice of IRA Provider

September 8, 2011 (PLANSPONSOR.com) - Nearly half (48%) of retirement plan participants who rolled plan balances into IRAs during the past two years chose their rollover institution based on whether they already had an account there, according to a new study released by Spectrem Group.

This makes existing relationships the number one factor driving the choice of IRA providers.  Other factors include a wide range of investment choices (29%), excellent customer service (28%), recommended by a financial adviser (27%), record of strong investment performance (27%), and low fees (26%). 

Adviser relationships also play a key role in IRA rollover decisions. Depending upon their circumstances, at least 61% of investors involved a professional adviser in the process. Among job changers, for example, 61% used a professional adviser for rollovers. That percentage rose to 74% for those who were retiring and 77% for investors with large balances over $100,000. 

Spectrem found that Fidelity was considered by 38% of all individuals looking to open an IRA account. Other providers considered by investors included Charles Schwab (25%), Vanguard (24%), ING (18%), and American Funds and J.P. Morgan Chase (tied at 15%). The providers that actually won the IRA accounts included Fidelity (30%), Vanguard (11%), American Funds (9.2%), Edward Jones (7.1%), and Morgan Stanley Smith Barney (6.6%).  

One of the primary reasons these firms won the IRA accounts is that almost 70% of investors turn to their financial adviser for advice concerning their rollover. Not surprisingly, in many cases, the advisory firm (i.e. Morgan Stanley, Edward Jones) offers an IRA account solution of their own. American Funds, for example, is a popular fund family for advisers not affiliated with a large firm. It is likely that independent advisers assisted investors in choosing American Funds.   

Another important selection factor identified by investors is “Low investment management fees.” Sixty-nine percent of those rolling over an IRA look for low investment management fees. “Customer service from a person, not a VRS” is the most important selection factor for 70% of investors. To the extent that an individual is relying upon their adviser to choose a provider, it is not surprising that they already feel they have a person and not a system, Spectrem said.

Income Products Attract Investors  

Spectrem’s Millionaire Corner research shows fixed-income arrangements appeal to investors who worry they might outlive their money, or that another economic downturn could cut into their income. At the same time, investors seek products that are somewhat liquid, charge reasonable fees, and keep pace with inflation.  

Overall, 10% of investors surveyed in 2011 put all or some of their 401(k) funds into some sort of arrangement designed to pay them regular income. The most common approach, used by 43% of survey participants, is scheduled withdrawals from their 401(k)s. These investors will systematically “spend down” their accounts. Another 31% say they purchased a fixed annuity or other annuity product, and 22% say they invested their 401(k) funds in a portfolio of fixed-income securities and plan to harvest the interest.  

Of the investors who purchased an annuity, 45% say it was an option offered by their 401(k) plan. Another 20% of the investors say they opted for an annuity product offered by the financial firm providing their 401(k) plan. One-third of the investors bought the annuity from a company not connected with the plan.  

Insights from Spectrem’s Millionaire Corner can be found at http://www.millionairecorner.com  

The Spectrem Group study “The IRA Rollover Market 2011,” is based on an online survey of 940 individuals who have had the opportunity to roll over a qualified retirement plan balance of $5,000 or more within the past two years. The survey was conducted in July 2011.