Rollover Replay

The days of relying on home ownership as a retirement wealth builder have gone the way of the dodo.  Likewise, defined benefit plans as a source of retirement income. This puts renewed importance on savings in defined contribution plans.  It also means paying very close attention to the process of rolling money over from an employer-sponsored plan.  At best a mundane topic but one that merits a closer look.

It's always been table stakes for investors taking a lump-sum distribution to get the paperwork right in order to avoid taxes and penalties. And most providers do a good job in explaining what a plan participant needs to do.  But a new element of risk has been introduced to the rollover process by today's tremendous market volatility that makes a successful rollover not just about the what but the when.

With frequent market swings of 3% or more, it's essential that investors understand when their current 401(k) holdings will be liquidated by the plan and then reinvested by the new IRA provider.  With respect to the former, most plans are self-directed and participants can initiate the sale rather than relying on the 401(k) provider. Getting an exact date when the dollars will arrive at the new destination can be challenging, but it never hurts to ask.  

It's also important to be proactive with the new IRA provider.  Even though you may have agreed on an asset allocation strategy prior to the lump-sum distribution, never assume the investment has actually taken place.  Understand the obligation of both the old and new provider with respect to the timely transfer and investment of rollover assets. Missing that 3% up move can wipe out a year's worth of earnings in today's low rate environment. If assets weren't transferred or invested in a timely manner, throw the challenge flag and ask for a replay.

It's ironic that with trillions of dollars coming out of qualified plans the IRA rollover process remains more of an art than a science. Be assured the last thing asset managers want is money sitting in cash where margins (if any) are razor thin.  But many firms are reluctant to invest in their operations while they continue to reduce back office staffs.  This results in highly manual, error-prone processing which is especially problematic given today's roller coaster markets.

If you're contemplating a rollover, understand the timing on both ends of the transaction.  If you have a rollover in process, look to see when the those assets were sold in the 401(k) or 403(b) plan and stay on top of the new IRA provider.  And if you recently rolled money over look to see if the assets were transferred and invested in the timely manner you expected.

Defined contribution plans will take on even greater importance in retirement as pensions march toward extinction and real estate remains a deeply troubled asset.  Paying close attention to the what and when of the rollover process can help keep your retirement off the endangered species list.