Thursday, February 14, 2019

Rolling Over All the 401(k)s

One of the projects that I slated for completion during my first year out of law firm life was to simplify my finances. The first task: rolling over all the 401(k)s. Here is an article from NerdWallet that identifies issues to consider before initiating a rollover and here are some high level notes on my personal experience with the process:

Context. I had worked at three firms and participated in each firm's 401(k) plan. Each 401(k) plan was administered by a different financial services firm (Charles Schwab, Bank of Oklahoma (!?!) and T. Rowe Price). I rolled my 401(k) funds into an IRA  that I had opened years before graduating from law school.

Why? When you leave or lose your job, you can do one of three things with your 401(k) funds: withdraw, rollover or do nothing.
  • Withdrawing pre-tax dollars may result in penalties or taxes. No thanks! Unless faced with an emergency, I would not consider withdrawing 401(k) prior to the age of 59 1/2. 
  • Rolling over funds from a 401(k) into an IRA may allow you to reduce expenses without incurring taxes. Seemed like the obvious choice.
  • Doing nothing--leaving the funds in your former employer's 401(k)--may or may not be an option depending on the terms of your 401(k) plans and may result in fees. For example, my first law firm's 401(k) plan tacked fees on funds of former employees if such employee's balance within the fund fell below a certain amount. Some of my 401(k) funds had languished for years before I got around to rolling them over.
I took taxes, fees and a desire for simplicity into consideration when I decided to rollover my 401(k) funds. Next, I would need to decide where I would deposit my rollover.

Where? I considered rolling my 401(k) funds into my current employer's 401(k) and my IRA, and decided an IRA worked best for me.
  • Current employer's 401(k). While I've read online that this is sometimes the best option if your rollover amount is too small to meet minimum investment requirements elsewhere, this didn't apply to me. I reviewed my new 401(k) plan and quickly realized that rolling into my current employer's 401(k) offered no benefits, and would result in higher fees than any of my prior employer's 401(k) plans and a significant loss of flexibility. (This article from NerdWallet was a helpful starting point for thinking about how to assess my current employer's 401(k) plan.)
  • IRA. This option offered the most flexibility and the lowest fees. It's worth taking some time to make sure you've got the right sort of IRA set up to avoid headaches further down the road. (Vanguard offers a short and sweet explanation here.) I rolled traditional 401(k) funds into a pre-existing, traditional IRA because I wanted to continue deferring taxes on my contributions and gains.
How? This should have been easier than it was. Dear millennial, I warn you that you will likely need to pick up the phone. (Cynically, I think the 401(k) administrator's make this process difficult to try to deter rollovers.)
  1. Convert to cash. If you're particular about the timing of your exit from non-cash positions currently held in your 401(k), you may need some lead time to convert your holdings into cash.
  2. Understand the 401(k) administrator's process. Visit the 401(k) administrator's website to read about the steps they require to initiate a rollover. (The 401(k) administrator is the financial services firm running the 401(k) plan, e.g., Charles Schwab.) Each of the administrators I worked with required a slightly different process pursuant to the 401(k) plan documents. Jot down any questions you may have. Some process steps that surprised me:
    • Each plan issued a paper check instead of transferring funds electronically. How much longer are we going to carry on like this? It's 2019.
    • One of the plans stipulated that the rollover check could be sent only to my home address. This was a concern since the security of my mailbox is in question (I've had three checks stolen from my mailbox in the last year). So I watched for the mailman like a hawk and, upon receipt, forwarded the check to my IRA administrator via carrier pigeon. Joking about the pigeon, but the process sure felt like it took forever.
    • One of the plans levied an unavoidable $25 administrative fee on the rollover. Funny how plan terms reflected each firm's culture.
  3. Understand the IRA administrator's process. Visit the IRA administrator's website to read about the steps required to receive rollover funds. In particular, look for requirements related to how the 401(k) administrator should write the check when transmitting the rollover funds. Some wrinkles in this process:
    • My IRA administrator requires that a rollover check be payable to "[administrator's long firm name] FBO [beneficiary's name]" which in all cases exceeded the character limit in the 401(k) administrator's systems. I placed a call to the IRA administrator to confirm which abbreviations would be acceptable, but I think many administrators include truncated payable to information on their websites. When in doubt, confirm!
    • My IRA administrator required the completion of an online form to alert them as to the incoming rollover. I suppose this is when you'd want to set up your IRA if you didn't have an existing one.
  4. Coordinate with the 401(k) administrator. Call the 401(k) administrator to confirm that your former employer has notified the administrator that you are no longer an active employer, ask the questions accumulated in step 1, and initiate the rollover (in my case, via online form).
  5. Monitor progress and follow up as needed. Once the rollover check was mailed (but not yet deposited), my 401(k) account reflected a zero balance. I kept an eye on my IRA administrator's website to confirm that the rollover check had been processed in the expected amount.
    • One of the plans issued a pro rata interest payment shortly after my rollover, which meant I had to repeat the rollover process to completely close out my balance in that plan. 
  6. Watch for tax forms related to the rollover. Some of the plans sent my 1099-R immediately after the rollover, others waited until the following February.

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