Filbrandt Reports

3 Hidden Risks of Consolidating Your Retirement Accounts

Volume 19, Issue 3

Executive Summary:

In this report, you will learn:

  • What benefits you may lose when consolidating retirement accounts
  • The core strengths of each type of custodian you have
  • A basic understanding of “custodial maximization” and why it’s important
  • An alternative solution to consolidating your investments at one custodian that may better suit your needs

Sometimes, “simpler” doesn’t mean better.

When we sit down and talk with university professionals, it’s common for them to have several retirement and investment accounts. Perhaps they’ve worked at multiple universities, or their university went through a retirement plan custodian change. If the university offers more than one plan custodian, they may have an account with each. If married, both spouses may have various accounts, and many faculty have inherited additional accounts from their parents. 

Most often the only solution in their mind to manage these many accounts is to consolidate their multiple accounts into one. The benefits may seem obvious at surface level – one quarterly statement instead of several, one individual advising on all retirement assets instead of having a different point person for each account, and perhaps less complications for a spouse or heirs at the time of death.

However, in our experience it is rarely in a university professional’s best interest to have all assets consolidated with one custodian.

This report will help you understand the three hidden risks of consolidation, and provide you with an alternative way to manage your many accounts that you may not have considered.

Risk #1: Missed Opportunity for Custodial Maximization

The financial institutions who hold onto, or keep “custody” of assets, are referred to as custodians. They are responsible for safeguarding securities and other assets on behalf of the client. Because of the enormous responsibility to keep these assets safe and well documented, custodians tend to be very large, reputable firms. (See below for examples.)

In our experience, there are only a handful of major custodians available to university employees through their university retirement plan. Each custodian has a unique industry background, their own inventory of investment products, and inherent strengths and weaknesses. No one company can be the best at everything, but with the right combination they can complement each other well.

If all assets are rolled into one type of custodian, the investor will miss the opportunity to harness the strengths of the other options available.

Ideally, an individual would set their target asset allocation, investigate which custodians are available to them, and select the “best of the best” investment options within each. 

We call this method custodial maximization

Three Main Types of Custodian

  • Insurance Companies
    Examples: TIAA, Valic, Voya, Securian

    Insurance companies provide strong solutions for fixed income options, real estate funds, and provide annuities. For example, TIAA offers a unique guaranteed account exclusively to university plan participants. The TIAA Traditional account guarantees the safety of principal and provides a healthy rate of return, generally around 3-4%, in our experience. Similar products are offered to university professionals at other reputable insurance company custodians; examples include the Valic Fixed Account, Securian General, and the Voya Fixed Plus Account. The guarantee of principal is backed by the full faith and credit of the insurance company itself, thus this type of product is only available from an insurance company custodian.
  • Mutual Fund Companies
    Examples: Fidelity, Vanguard

    Mutual fund companies produce a vast selection of low cost equity options which can help clients build a well-diversified stock portfolio. Fidelity and Vanguard serve over 27 and 20 million individual clients, respectively, and are the most common mutual fund custodians available to university professionals. When under the university umbrella, these custodians offer lower institutional rates, thanks to the purchasing power of the university. This provides tremendous savings for university professionals when compared to higher retail rates they would pay outside the university plan.
  • Brokerage Firms
    Examples: Merrill Lynch, Edward Jones, Charles Schwab

    Brokerage firms are robust financial institutions that act as a liaison to buy and sell just about any stock, bond, or other financial product a client would want (with the exception of the unique guaranteed accounts offered by insurance companies to university retirement plan participants). Most typically, brokerage accounts are utilized by university professionals for after-tax investments, outside the scope of their university retirement plan. The vast selection of investment options available can be attractive to university professionals who may feel limited by the list of investment choices offered in their university plans. 

Risk #2: Irreversible Loss of Benefits

In addition to preventing you from maximizing the strengths of multiple accounts and vendors, a consolidation may also cause you to forfeit grandfathered benefits – and in some cases, this change is irreversible. 

We’ve seen a growing trend in custodial changes at major universities. Either a new custodian will replace an existing custodian, or the university will transition from offering multiple custodians to only offering one. The important thing to remember during custodial changes is once you leave a custodian, you may not be able to go back.  

For example, if during a transition between custodians you were to roll your TIAA assets into the new plan, and TIAA is no longer a provider under the new plan, you will have severed access to TIAA products, including the TIAA Traditional guaranteed account previously described. 

Once retired, university employees may experience limited ability to move assets back into the university retirement plans. In fact, if the accounts are rolled outside of the university and the professor has retired, they are no longer eligible to roll money back into the university plans – severing all future access to the lower institutional rates and guaranteed accounts provided by the university plans. 

There are even unique situations in some states that provide savings on state income taxes, or continued employee health insurance for university retirees if assets are maintained within the university plans. All states and institutions have their own unique laws and regulations, so it is important to investigate all possible benefits you may be forfeiting before consolidating any of your accounts.

Risk #3: Premature Distributions

Once an individual turns age 70.5 they need to begin taking required minimum distributions (RMD’s) from pre-tax retirement accounts, and pay the income taxes on the distributed amount.

If the individual’s retirement accounts are still custodied at the university from which they are collecting a paycheck, they can typically continue to defer RMD’s until they retire from that university.

However, if the university retirement account was consolidated into an outside account, the individual may be required to take RMD’s earlier than they otherwise would have.

If an individual is still working or they have significant assets in the bank, they may not want or need the additional income.  In fact, it can be quite costly from a tax perspective to collect a regular paycheck and required minimum distributions.


Alternative Approach: Consolidated Reporting

Instead of consolidating your retirement accounts to one custodian, we suggest consolidating your reporting. A consolidated statement showing all investments in one document, regardless of where they are custodied, will allow you to benefit from the strengths of your different custodians, take advantage of grandfathered benefits, and provide you with the simplification you’re looking for. Within one document, you will be able to see exactly what investments you have, where they are custodied, how much money you have added or withdrawn, how much your university has contributed, and a clear return on your investments as a whole.

The benefits of consolidated reporting expand beyond the scope of this report. Once your different accounts are viewed together on a consolidated statement, often-missed planning opportunities can become more apparent. Opportunities to save on taxes and/or administrative fees are very often revealed. Similarly, a consolidated report can reveal unintended risks in your portfolio. You may have too much or too little market exposure in your overall portfolio even though your individual accounts may seem well balanced.

The most valuable benefit of consolidated reporting is often seeing the “big picture” view of your portfolio, so you can assess how everything is (or isn’t) working together for your benefit. This view is absolutely vital to an effective retirement income distribution plan.

Where to Start

While important, consolidated reporting is not typically feasible for the average university professor to do themselves. They typically do not have the time or interest in managing their portfolio to this standard. Furthermore, it is not typically possible for the advisors employed at insurance companies, mutual fund companies, and brokerage firms to provide this level of consolidated reporting and independent management to their participants, due to the obvious conflict of interest. 

University professionals should seek an independent, fiduciary adviser who is capable of providing objective advice on all accounts and the capacity to produce regular, consolidated reports to their clients.

Clients of Filbrandt & Company receive regular consolidated statements as a part of our ongoing service, as well as an online portal to view account information in real time. Clients enjoy the simplification of one consolidated statement, while maximizing different companies’ strengths, utilizing the “best of the best” funds available within each, and best of all: they don’t have to do the work themselves.

Volume 19, Issue 3

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