Rolling over a 401(k) is a pain–and potentially costly
The federal government has secret shoppers like Consumer Reports has, and they’re not afraid to use them. Last year, investigators with the Government Accountability Office contacted the 30 largest 401(k) service providers to see how easy it would be to move 401(k) savings from one plan to another, as when one joins a new company. What they encountered, in a report the GAO released this week, was inefficiency, and occasional misinformation.
The inefficiency often begins with your employers. A new employer may want to be certain that your 401(k) plan is a one that qualifies, but your old employer may not be so prompt in confirming the information. It is up to the participant–you–to make sure your old employer completes the paperwork. And when the GAO’s investigator contacted the 401(k) plan providers for guidance, he was often steered toward a rollover IRA, despite knowing nothing about his particular financial circumstance.
For those who still want a rollover from one 401(k) plan to another, the GAO found that plan providers often preferred to send the check to the plan participant instead of sending the funds electronically to the new plan. That puts the burden on you to see the check gets to its destination, which in the interim isn’t earning interest or otherwise increasing in value. And it could saddle you with a tax burden if you don’t reinvest it within 60 days.
With all these impediments, it’s no surprise that savers opt for the path of least resistance and instead move their savings into a rollover IRA plan, one often administered–shock–by the same firm that administered the 401(k) plan. According to one plan sponsor the GAO contacted, only 10 to 15 percent of participants ultimately move savings from their old 401(k) plan to their new employer’s plan.
A rollover IRA isn’t necessarily a bad alternative for your retirement savings, but it may not be the best choice for everyone. For all the complaints we have about 401(k) plans, they are at least required to offer participants suitable all-in-one retirement portfolios like target date funds. Money in a rollover IRA can be more broadly invested, but that’s not necessarily ideal if you’re not prepared to research the stocks, funds, and asset allocation for your particular situation. And you need to be aware if there are any fees associated with opening and maintaining a rollover IRA account.
If you believe you former employer may have a better 401(k) plan, there’s nothing stopping you from leaving your savings there, as long as assets exceed $5,000 and you are less than 62 years old. However, some plans will discourage this by charging former employees additional fees to stay in the plan. And although you may want to move your old 401(k) savings to the plan of your new employer, not all 401(k) plans accept rollovers.