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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 accounts (IRAs) when changing jobs. A study by the U.S. Government Accountability Office (GAO) 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.

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Discussion

Cal Shaller from Pennsylvania posted 11 months ago:

I have yet to see a discussion on rolling over 403(b) plans to alternative brokerage accounts and the difficulties associated with Pay Out annuities. Not everyone has access to a 401(k).


David D. from Colorado posted 10 months ago:

The biggest problem with rolling a 401(K) into another 401(K) is that you are limited to investing in the options in the plan which can (and will) change at the whim of the administrator. Plus the money is stuck there until you change employers or retire. With a rollover IRA you have almost unlimited investment options.


Rick S. from Illinois posted 10 months ago:

What would have been nice in this (or a follow-up) article is a discussion of 401(k) vs IRA differences. In the past a 401(k) had better protection under bankruptcy law but since the bankruptcy overhaul a few years ago I'm not sure if that has changed.

This whole topic of retirement account roll overs could certainly stand additional attention. Considering that almost all 401(k) roll over information is coming from the IRA industry, it seems that naturally it's going to be biased.


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