401(k) Rollovers: How to Move Your Retirement Account without Getting Burned

A recent study[1] estimated that American workers will have left almost $1.35 trillion behind in retirement accounts after changing jobs.  And these aren’t always small balances, either—the researchers estimated the average forgotten account at around $55,000.

When you leave a job, you often have the option of leaving your retirement account where it is.  However, then it can be (clearly) easy to forget and you may end up having retirement savings in many places.  That’s one strong reason to consider something called a 401(k) rollover. 

What is a 401(k) Rollover?

The rollover process solves that problem.  Retirement accounts are portable, meaning they can move with you.  So when you leave a job, you can move that money one of several places:

• Into a new IRA (Individual Retirement Arrangement or Account), which you can open anywhere you choose.
• Into your new employer’s retirement plan, although you’ll have to follow strict guidelines to do so.
• You can even cash it out; however, you’ll lose much of your savings to taxes and steep penalties.    

If you roll it over into an IRA, you’ll get substantially more investment options than you’d get in your employer plan.

Doing so can make your life easier, with fewer statements and passwords to remember.  It can also be far easier and often less expensive to manage fewer retirement accounts.

Sounds great, right? 

Yes, there are many positives about rolling over your account into an IRA.  This along with an aging workforce has led to a record $500 billion or more being rolled over[2] every year.

This large number does not go unnoticed by Wall Street.  Since every dollar coming out of retirement plans represents a dollar that can generate commissions and fees, financial advisors and wealth managers are eager to help you out with the process. 

Many have your best interests in mind and can help you successfully rollover your account, so you can enjoy a financially secure retirement.

Others, however, are not so helpful.

Beware Conflicts of Interest

Unfortunately, in their clamor to get a piece of this billion-dollar money flow, some financial services firms may not be consistently putting your interests first.’

FINRA, the financial services regulator, previously stepped up enforcement[3] against improper 401(k) rollover advice.  This followed a finding by the U.S. Government Accountability Office[4] that retirement plan participants “are often subject to biased information and aggressive marketing of IRAs when seeking help with their plans.”

Not surprisingly, impacted employees started sharing stories and paying attention.  Former employees from major corporations such as UPS, Hewlett-Packard and AT & T[5] have all complained that aggressive representatives advised them to roll over their retirement savings into unsuitable investments in a new IRA.

Here’s what usually happens.  These aggressive financial representatives entice employees to move their savings through cold calls, ads on the internet, and even cash incentives.  They may promise advantages of having much broader investment options in the IRA.

Of course, if you do roll your 401(k) into low-cost mutual funds in an IRA, you very well may save money and end up better off.  But some of these aggressive brokers push investors into high products unsuitable for their retirement fund.  Why? Sadly, because these investments put more commission or fees into the advisor’s pockets.

You’d think this is a rare event.  Unfortunately, these conflicts of interest run deep on Wall Street.  One government task force report estimated that conflicted advice costs American retirement savers over $17 billion[6] every year.

Because people’s retirement savings may be on the line, this bad advice can be especially damaging.  That’s why many people end up taking legal action. 

Seeking Legal Assistance When Fraud Occurs

One example occurred in Seattle. There, many AT & T employees were encouraged to roll over[7] their retirement accounts into high risk but high commission investments in new IRAs. The two advisors involved generated hundreds of thousands of dollars in commissions.  Not only that, they also  earned bonuses such as trips to the Bahamas and other luxury destinations

Unfortunately, the clients paid the price.  Since that occurred, over 37 of the former AT & T employees have filed complaints against the advisors, according to FINRA records reviewed by Bloomberg News. ^v  A former AT&T administrative assistant noted that while the advisors maintained that the investments were suitable, her retirement account balance had fallen to $100,000 from over $390,000.

Rolling Your 401(k) Over Safely

Clearly, you must proceed carefully when rolling over your retirement account.  Fortunately, as long as you stay aware of the advice you’re receiving, you can rollover your 401(k) without getting burned.  Here are some tips to keep in mind to stay out of harm’s way.

1. First, is there a benefit to leaving your account where it is now or rolling it over into your current employer’s account?  Check out your investment options and fees.  If your plan has low-cost investments, it might be best to keep it with the employer, if allowed.  One compelling reason to roll it over?  If fees are high in the account.    
2. If you’re rolling it over, keep in mind that your goal should be to get suitable investments at the lowest possible fee.  Look at the annual expense ratios that you will be paying on the mutual funds or exchange-traded funds (ETFs) that you would consider investing in.  A goal should be to lower your fees, as research shows these costs imply handicap your performance. 
3. If you were offered a “No Fee” IRA, read the fine print.  Often there may not be an account fee, but you’re still responsible for paying investment and transaction-related expenses. 
4. What is your financial sophistication?  Are you comfortable managing your own account?  If not, you may want to look for an account that has access to a financial advisor.  But check out how that advisor is paid.  To avoid conflicts of interest, consider a fee-only financial advisor.
5. If you’re considering getting help from a financial advisor, ask if they act as a legal fiduciary for you.  Then request that in writing.  Fiduciaries are required to put your interests first. If they don’t, you have clearer legal recourse, so hold on to that document. 
6. Consider getting a second opinion before making a decision.  Financial advisors usually provide free consultations, so use that time to get more input from other professionals. 

If you proceed with a rollover, you must handle all of the paperwork and cash transfer with care.  If not, it’s easy to create a significant tax problem for yourself.  Work with the broker or advisor on the other side and have them help with the paperwork, so you don’t create any tax headaches for yourself.

Whatever you do, take your time and investigate your options so you do it right.  Your future is too important. 

Were you Scammed When You Rolled Over Your 401K?