1/17/2012 7:50 PM ET|
Is a 401k rollover smart right now?
A reader asks how to move a retirement-savings balance into a new employer's plan while avoiding potential losses in a volatile market.
Q: In this volatile market with its day-to-day major price swings, I need to roll over my previous 401k to my current employer's 401k program. What's the best way to do this rollover to avoid any big losses due to a falling market?
A: Great question. I'm assuming you're invested in a portfolio of mutual funds with your previous employer. You want to do a trustee-to-trustee transfer of these funds, where the money moves directly from your old plan to your new plan. This way, your previous employer isn't required to subject the funds to a mandatory 20% withholding tax. If your former employer cut you a check, that would force you to come up with the withheld amount in order for the funds to remain fully invested in the new retirement plan.
The trustee-to-trustee transfer will be in cash, so the mutual funds held in the former employer's account will have to be sold. Open-ended mutual funds trade only at the net asset value of the funds at the end of the trading day. Closed-end mutual funds can trade at a discount or premium to the fund's net asset value and can trade like shares of stock during the trading day. It's far more likely you own open-ended funds in your 401k. You should be able to log in to the online platform of your previous employer's 401k plan and request the exchange of your mutual fund shares for money market mutual fund shares. Choose a nice, conservative money market mutual fund such as a U.S. Treasury fund. Request the transfer toward the end of the U.S. trading day, prior to 4 p.m. ET. Transfer requests placed after 4 p.m. will trade the following trading day.
If you want to control when the shares are sold, you can sell them yourself in the old plan by moving the money from the mutual fund to a money market mutual fund. Then, when you request the trustee-to-trustee transfer, you're getting out of a low-volatility investment and moving the money into your employer's plan. You can make the same type of decision in the new plan, where you invest the money in a money market mutual fund and then change the investment allocation to your desired allocation on a day you feel is opportunistic for the reallocation.
The conversion to cash has to happen before your previous employer can do the trustee-to-trustee transfer, so you're controlling the asset allocation but the employer controls the timing. There's no guarantee you won't miss a few up days in the market, but then again you were looking to protect against downside risk.
I'm not a huge fan of rolling old 401k plans over to a new employer's plan, and I'd like to think I'm a pretty knowledgeable investor. You can gain a lot of flexibility in how the money is invested by transferring it into a traditional or Roth individual retirement account rollover and possibly save money in annual account administration fees and expenses, too.
Figure out why you want to move the money to your new employer's plan. Convenience is one reason. The investment alternatives are another. I'm not saying it's the wrong decision. I just want you to think through why you're making this decision to improve the odds it's the right one for you.
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There are a few Democrats (I'm not being political, just stating facts) out there that have openly expressed a desire to confiscate 401ks and make basically a 2nd Social Security system where we are guaranteed like 2 or 3% return.
You're incorrect. No one has remotely proposed what you said. What has been proposed is requiring 401k's to offer an annuity with a guaranteed return as an option.
Whever you heard that was wrong (and 'being political').
Lots of info online about IRA options, but I found a ton of help on www.fipath.com. Their 401k rollover tool is awesome--I used it to help pick a firm to open my IRA up at.
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