The Difficulty of Rolling Over 401(k) Savings
Workers are both inadvertently and purposely encouraged to roll over their 401(k) plans into individual retirement accountswhen changing jobs. A study by the U.S. Government Accountability Office found that complexity, marketing efforts by IRA sponsors and a lack of clear information combine to steer workers toward IRAs.
Complexity is a major barrier to rolling over funds from a former employer’s 401(k) plan to a new employer’s 401(k) plan. Plans can require a lengthy verification process to ensure the funds being rolled over are tax-qualified, meaning they qualify for tax-sheltered status. Plus, paperwork often differs between plans. These two factors can create a lengthy process, one during which the employee may not know if his assets are currently invested or not.
At the same time, plan sponsors often encourage employees not to move their retirement assets to a different 401(k) plan. When an individual calls for assistance in rolling over a 401(k) plan, they can be pitched services from the current plan sponsor. Separation packet material is often just as biased. The GAO found materials from several plan sponsors that emphasized the simplicity of rolling over to their IRA products versus the complexity of taking the retirement assets to another provider. Compounding the problem is that many 401(k) participants think they are getting objective information on handling their accounts, when in fact they are not.
Third-party IRA providers may not be much more clear. The GAO criticized marketing efforts for no-fee IRAs. They found that nearly a quarter of call center representatives said their IRAs were “free” or had no fees with a minimum balance. What was not mentioned were investment, transaction and other related fees that could still apply.
Investors changing jobs need to take the time to consider their options. An IRA offers much in the way of flexibility and control. A 401(k) plan with attractive fund options, however, can be a good option for investors, especially those favoring simplicity. When changing jobs, both options need to be considered, since employers will not accept rollovers from an IRA. It is also critical to ensure that the rollover is a direct rollover (a check is sent to the new plan) instead of an indirect rollover (the check is sent to the investor). The latter has tax consequences and potential tax penalties.
Source: “401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants,” U.S. Government Accountability Office, March 2013.