401(k) Rollovers: The Good, The Bad, and The Ugly

The first, and sometimes only, introduction you may have to investing is through your 401(k) plan at work. This could leave you vulnerable from the get-go, although you may not realize it. After all, the 401(k) plan provider is vetted and hired by your company to administer the retirement plan, so most would assume the provider will give you great advice. But a recent Government Accountability Office (GAO) report may lead you to reconsider those assumptions when it comes to how providers handle questions from employees leaving their current companies. The result sometimes sounds a bit more like a sales tactic than pure advice. 
 
When an employee has left a company and wants to get money out of the plan, the only option is to have a conversation with the provider.  These providers are usually large insurance or mutual fund companies who make a lot of their money by convincing people to put their investments with them to manage. So if an employee getting ready to leave a company calls up and asks about the 401(k), the person on the other end of the phone has a bit of a bias. Of course they want that 401(k) money rolled over into an IRA managed by their firm.
 
In fact, many times when our office helps a client with this, we go to the provider’s web site to download a form to start the rollover process and find the only instructions and forms available are to roll the plan into that firm’s accounts. Want to move it somewhere else? No problem, just call and talk to one of their sales people…er…”advisors.”
 
But a rollover sometimes isn’t the best option and it is never the only option. So what happens if the employee doesn’t know what to do and calls to ask the provider what they should do about the money in their former employer’s 401(k)? Well, according to the GAO report, it seems that about one-third of the firms recommend the IRA rollover without taking time to find out anything about the employee’s situation or discussing the other options they have. (There were many other troubling things that came out of this investigation, but you get the drift.)
 
If you are leaving a job and have a 401(k) there, a discussion of options should indeed include a rollover to an IRA. And more often than not this is the best recommendation. But you should also discuss and consider keeping the money where it is, rolling it into your new employer’s plan, or even cashing it out.
 
While the majority of plan providers seem to do a decent job helping the plan participant navigate an exit strategy, with one-third allowing their greed to get in the way, it is a good idea to do your homework before you make that call or visit a representative.
 
This article was published in the Wichita Falls Times Record News on May 12, 2013.