Worker’s 401(k) rollover may be easier said than done

The Bakersfield Californian
June 26, 2014

As with many things in life, distributing funds from an employer’s 401(k) plan may be easier said than done.

Consider my client, who I will call Sam, who retired in 2004, but left his money in his former employer’s 401(k) plan. Sam had other funds invested in separate accounts with a financial adviser.

Sam was approaching the age at which the IRS would require that he take “mandatory” withdrawals from his tax-deferred accounts. For ease in managing these withdrawals and to develop a unified investment strategy, Sam decided to “roll over” the money from his former employer’s 401(k) plan into a tax-deferred IRA in his other accounts. Sam came to me for assistance.

The former employer’s 401(k) plan featured an easy-to-use website, with printable forms for most tasks — reallocating investments, changing beneficiaries, obtaining loans, etc. But Sam could not find a form for rolling over assets from the 401(k) plan to another plan. Neither could I find an appropriate form when I checked the website.

A call to the plan administrator’s office revealed that such a form could only be obtained with a written request sent via U.S. Postal Service. The form then would be provided via U.S. Postal Service. After it was completed, the form would have to be returned to the plan administrator via U.S. Postal Service. Roughly adding up the U.S. Postal Service time and processing, Sam figured it would take more than a month just to request the rollover. The plan administrator is not compelled by law to timely process a request for funds and it would be several more weeks before Sam’s money would be available for reinvestment.

Sam persevered, mailing his request and waiting weeks for the form to arrive. Meanwhile, Sam received calls from his 401(k) plan administrator pleading for him to leave his money in the plan, or to roll it into an IRA account administered by the plan. Now steaming over the obvious stalling tactic, Sam refused the overtures.

What Sam and I once thought was a straightforward, easy rollover process turned out to be unnecessarily complicated and time-consuming. These are the same findings of a 2013 Government Accountability Office study that recommended the IRS and Labor Department develop uniform standards and require plan administrators to act in the best interest of participants.

Researchers with the GAO found plan administrators frequently made rollover recommendations that benefited plans — through the collection of commissions and fees — rather than enhancing the investments of participants.

When an employee retires or takes a job with a new company, he or she has basically four options when it comes to tax-deferred 401(k) savings:

  • If permitted, they can leave the money in the former employer’s plan.
  • Roll over the assets to the new employer’s plan, if one is available and if rollovers are allowed.
  • Roll over the assets into an IRA.
  • Cash out the account value.

Cashing out should be a “last resort option.” It likely will carry tax consequences and result in a greatly reduced return.

Each option must be evaluated based on the individual circumstances of a plan participant. There is no “one size fits all” answer. For some, allowing funds to remain in the former employer’s plan or rolling them over to the new employer’s plan may be the right strategy. Others may benefit from having a wider choice of investments and having more flexibility when money is placed in a privately managed IRA.