DIY plan-to-plan portability is harder than you think
Have you ever tried to fix a leaky kitchen faucet yourself? If so, the task probably seemed simple at the outset. However, if youre not an experienced plumber, you may have inadvertently compounded the small problem of a leak perhaps by over-tightening a nut, pinching the washer, stripping the threads, or worst of all, splitting the pipe and unintentionally made the situation worse, as well as expensive to fix.
Dont feel bad; youre not alone. Some tasks look easy, but actually require more expertise and assistance than we first imagine, and in many cases we would be better off calling the plumber sooner rather than later. Leaving your 401(k) behind or trying to move it by yourself can be like trying to fix that leaky faucet a small nagging problem that over time ends up costing you a surprising amount of money. Transferring a retirement savings account balance between employer-sponsored plans is more complicated than it may appear, and for most people is not a do-it-yourself (DIY) job.
To get an idea of just how convoluted it could be, take a look at this diagram.
Talk about complicated and time-consuming!
A participant who undertakes a DIY roll-in from their prior employers plan usually finds the process to be like a scavenger hunt but without a list of items youre supposed to find or teammates to help. First, a participant has to locate and contact the recordkeeper for their former employers plan, and figure out whether they can get their distribution online (sometimes they cant). Then, the participant has to complete two sets of forms one to get their old 401(k) balance out of their prior plan and one to transfer into their new plan. An error in either set of forms can invalidate the entire process, meaning you get to start all over again!
In addition to error-free paperwork, a participant needs to ensure that the balance being transferred arrives at the new plans trustee within a specified time frame. Many people who attempt 401(k) roll-ins choose to have the balances sent as checks made out to themselves. This choice can have unintended consequences, particularly if the roll-in is not completed within 60 days of the date the check is issued, causing the participants savings to become taxable. Any delay such as the recordkeeper for a former employers plan sending the check to a wrong or out-of-date address, and incomplete or incorrect paperwork can make the roll-in much more expensive and time-consuming than the participant expected.
The roll-in is one of the more valuable yet under-appreciated plan features. Promoting and facilitating the roll-in is a cost-effective savings initiative with tremendous benefits to plans higher average account balances, stronger participant retirement readiness scores, etc.
Like plan enrollment and investment selection, with portability its best to eschew the DIY route.
Spencer Williams is president and CEO of Retirement Clearinghouse.