Steer Clear Of The Rollover Wringer

Lots can go wrong when transferring a 401(k)

It's supposed to be a cinch. Make a phone call, fill out a form, and presto!-- your nest egg is safely transported from one employer's retirement plan to the next. "Most times it takes about 15 minutes to take control of your 401(k)," claims a recent ad from Fidelity Investments. But rest assured, with $127 billion and a heap of paperwork changing hands every year, it takes but a few seconds to get tangled in the rollover runaround.

As if changing jobs weren't stressful enough. That's when you decide whether to keep your retirement money in your former employer's 401(k) plan, move it to a new plan, or roll it into an individual retirement account. Lots can go wrong: You can be involuntarily cashed out, get hit with early-withdrawal penalties, or miss out on market gains because of delays. Tracking transfers wired to the wrong accounts or wrong stocks isn't just an administrative hassle. Sometimes, these snafus can't be undone.

How do these things happen? Many mutual-fund companies and brokerages are "ill-equipped to serve the rollover market"--now worth $1.5 trillion and rapidly growing--concludes a recent study from Cerulli Associates. The Boston financial research outfit says only a third of these providers have sufficient programs to serve investors and most show a "remarkable lack of preparedness" for providing the educational materials, knowledgeable phone staff, or qualified advisers for 401(k) rollover issues. Investors need to shoulder blame, too. Many 401(k) participants take cash payments when changing jobs. They view the money as a windfall to pay bills or spend on nonessentials. Frustrated financial planners add that clients toss out statements and are blase about rollover follow-ups.

A few commonsense rules can help. While the nightmares aren't always avoidable, at least you'll have ammunition to fight your case.

What? You're not that Jane Doe? When a 35-year-old Dumont (N.J.) resident switched jobs in 1998, she wanted to transfer $50,000 from her former employer's 401(k) plan to a new IRA at Vanguard Group. The money was originally in two accounts: a profit-sharing plan and a defined-benefit plan, explains Thomas Orecchio, a planner in Oradell, N.J., who helped fill out the forms. That December, the Vanguard account was opened, and the first statement arrived the next month. The balance was short $16,000. That's because Vanguard had deposited one check into the account of another person with the same name except for the middle initial. That someone cashed out.

To Vanguard's credit, it finally restored the money four months later. But it took "ranting and raving" to make his client whole, says Orecchio.

The moral: Make copies of all forms you fill out, and mail them certified with a return receipt request. "Without that proof, it's out of your control," Orecchio says. Check statements to make sure account numbers match where the company says it has deposited your money.

Oops. We've cashed you out. Don't be surprised if a distribution check arrives in the mail. It's not unusual for the plan to put the burden on you to deposit it into your newly opened brokerage or mutual-fund account. But if the number on that check looks a lot smaller than the amount you had in your account, it's bad news. You've been cashed out, and the IRS has taxed and perhaps penalized you for early withdrawal. To add insult to injury, you now have to raise whatever was deducted and deposit the full amount in 60 days--or you're out of luck.

That's what happened to a client of Thomas Batterman of Vigil Asset Management Group in Wausau, Wis. When his client's company folded, she requested the transfer of her $15,000 retirement account to a new plan. Instead, she was cashed out and penalized, and is now $3,000 in the hole because the former custodian took out 20% withholding tax. Says Batterman: "Now, she had to come up with extra money because the company refused to remedy their error."

Moral: Request in writing a custodian-to-custodian transfer. That way, the check should go directly to your new plan. If it doesn't, be sure to deposit the check within the 60 days of its issuance--or the IRS will assume you've cashed out.

So, we took our sweet time on your request. Too bad about that market crash. In July, 1998, a couple near retirement requested their $200,000 account be liquidated to cash and transferred to a new IRA. Two months--and a 15% drop in the stock market--later, nothing had been done and the portfolio was worth $40,000 less. It's not as if the fund company, which Batterman won't divulge, apologized for the error and handed over the money. "I had to fight for it," he says.

The moral: If the date on your return receipt doesn't match the value of the investments you bought at that time, demand an adjustment.

Microsoft? We thought you meant MicroStrategy. Sometimes it's just a matter of an erroneous keystroke, but your money isn't always put into the right stocks or funds. It could be something subtle but with grave consequences: If you originally bought Class A shares and paid a front-end sales charge, and now own B shares carrying a redemption fee, you'll pay twice the sales charge. Perhaps you've asked that 100 shares get moved from one account to another, but in the meantime the stock splits. Guess what? "The other 100 shares are still in there. It takes weeks to get it corrected," says John Hixson, a Lake Charles (La.) planner.

Moral: Keep your statements. Check the number of shares, value, and symbol.

You already filled out 50 of their forms? Well, here's another 50 of ours. Christopher Brown of CommonWealth Advisory Group says his worst nightmare was inheriting a client who changed jobs five times and kept retirement accounts at each former employer. Consolidating accounts is "the biggest problem in the industry," he says. "There's no standard way of doing it." John R. Day, a Macon (Ga.) planner, asked for a transfer from a MassMutual plan to a Charles Schwab & Co. account. MassMutual, he says, wouldn't accept Schwab's forms. "They had a separate multipage form that required numerous client signatures," he says.

The moral: Find out what both ends require to avoid delays. And be sure to save copies of all completed forms.

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