5/21/2013 5:30 PM ET|
Rolling over a 401k? 7 problems
A change of employment can mean changes to your 401k, too. Be sure you know all your options.
When you leave a job, you have four options for your 401k plan balance: Leave the money in your old 401k plan, move it to your new employer’s 401k plan, roll it over to an IRA, or cash out the 401k balance. The last option will trigger income tax, and if you are under age 55 when you leave the job, an early withdrawal penalty.
However, a recent U.S. Government Accountability Office report found that many workers are discouraged from both leaving money in the old 401k plan and rolling it over into their new employer’s 401k plan. Many departing employees are also aggressively marketed IRAs, and actively persuaded to leave the 401k system.
“Participants can be easily steered towards IRAs given the number of administrative obstacles and disincentives to staying in the plan environment and the pervasive marketing of IRAs by 401k service providers and IRA providers generally,” according to the GAO report.
“Rolling over to an IRA can be a reasonable choice for many participants and, given the amount of money in IRAs, many individuals and former 401k plan participants appear satisfied with that option. But other options, such as staying in their current plan or rolling over into their new employers’ plans, may also be viable alternatives and could even be better options depending on an individual’s unique circumstances,” the report says.
Here’s why it’s difficult to keep your money in the 401k system:
1. Disincentives to stay in your old 401k plan. Plan administrators are not always required to allow former employees to leave funds in the 401k plan if the balance is less than $5,000 or if the participant is over age 62 or the normal retirement age. Some plans automatically distribute 401k balances under $5,000 to departing employees. Roughly 60% of plans are ambivalent about or even averse to keeping former employees in the plan, according to the GAO analysis of surveys of plan sponsors and asset managers. Plan sponsors who do not want former employees to leave money in their plans often cite the administrative burdens, costs, legal liability and not wanting the fiduciary duty to former employees. Some plans even charge higher or additional fees to former employees, restrict their ability to manage their savings or take a loan from the plan and limit distribution options.
Perhaps because of these restrictions, most people eventually withdraw their money from their old 401k plans. Among retirement account participants age 60 and over who left their jobs in 2004, about 50% of their plan savings remained in the employer plan one year after separating, but only about 20% of their 401k savings was still in the plan five years after leaving the job, according to industry data obtained by GAO.
2. 401k rollover waiting periods. 401k plans are not required to accept rollovers, so workers must contact the new plan’s administrator to determine if a rollover into the new 401k plan will be possible. And even if a rollover is allowed, 401k plans may have waiting periods before processing a new employee’s rollover, which vary by plan and can last weeks or months. The delay could leave participants uncertain about the status of their retirement savings.
3. Complex 401k verifications. 401k plans may require a lengthy verification process for rollover funds to ensure they are tax-qualified. The plan sponsor might request verification forms from the previous plan that individuals must get their former employer to complete and return. One plan sponsor told the GAO that only 10% to 15% of participants who leave the plan move their savings to a new employer’s plan because of barriers in the process, including many paper forms and the involvement of both plan administrators.
“That difficulty may discourage participants from keeping their savings in the plan environment, which generally has lower fees, better comparative information, and ERISA plan fiduciaries required to select and monitor reasonable investment options,” GAO found.
4. Lengthy paperwork requirements. There is no standardized 401k distribution paperwork, and many plans use different distribution forms. GAO reviewed 14 packets of sample distribution materials and found that they ranged from single documents of a few pages to multiple documents exceeding 15 pages in total. And more than half of the packets did not include a distribution request form, when means participants would need to contact their plans or service providers to request the necessary form.
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It's not easy. 401k rollovers are as burdensome as they get. I had 3 401ks scattered across 3 companies I had worked for. I decided to consolidate them into the Federal Govt Thrift Savings Plan when I moved to Federal Workforce. The fees TSP assesses are the lowest I've ever seen and though they don't have dozens of plans to choose from they do perform rather well.
It took me over 3 months of wrangling, phone calls, faxes and emails to get documents to transfer the funds. One wanted to cut me a check, which I had to tell them twice - NO. Directly send the funds to TSP. In the end, I was able to transfer almost all of my 401k to TSP. One employer required that I keep the portion they contributed to my 401k in their plan - kind of silly.
A year later my wife became a federal employee and it took me 4 months to get her 401ks rolled over. She was mad as a wet hen when she had to go to the notary public 3 times to get the documents prepared.
There is a little known fact regarding 401(k) plans versus IRA plans if you need to retire early. IRA plans require the owner to be 59-1/2 years old before the money can be withdrawn without an IRS penalty (you still pay income taxes on what you withdraw but not the added 10% tax penalty for early withdrawal).
With 401(k) plans the owner only needs to be 55 years old to withdraw money without penalty - provided they retired during the calendar year in which they turn 55 or later.
So IF a person feels they may be forced to retire earlier than 59-1/2 but after 55 (my former employer was notorious for pushing people out the door once they reached their mid 50s), they should keep the money in the 401(k) and NOT roll it over into and IRA.
I give credit to author for knowing this stuff, Once I tried to rollover 401K from previous employment to current job's 401K; what a nightmare. The admin of the current one, asked for letter-of-intent (LOI), I got it from the previous admin. But it was not the right one, calls-after-calls, no luck. I offered a 3-way calls among ourselves, but the admins say no can't do cause it's not her jobs to to resolve this kind of issues (WTF). So at the end I rolled it into IRA.
The only reason I was persistent on rolling all my retirement account to 401K, back then IRA was not immune to civil-lawsuit while 401K is (I could be wrong about this); but I believe they are all now.
Don't forget - Barry needs the money to redistribute to his pals in the Great Overpromise. One way or another, he will get your money.....
Keep playing the market people, hopefully you will come out ahaead and you won't out live your savings when you retire. As for me, 20, 30 or more years after I retire (at 55), I will still be receiving a retirement check along with cost of living raises every year along with my social security checks.
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