4 ways to guide retirement savers through 401(k) rollovers

4 tips for rolling over all of your client's old 401(k)s

June 2, 2023 10:58 AM

Rolling all one's retirement plans into one can be a laborious process, but financial advisors have ways of making it easier.

Few procedures cry out for the aid of a financial advisor more than the 401(k) rollover. The laborious process, which typically involves calling up plan providers that mail out paper checks, would be difficult for almost anyone without the help of a professional — and mistakes can cost thousands of dollars.

But it's also highly important for a secure financial future. Americans change jobs frequently, so rollovers are crucial to building their retirement savings. The average 401(k) participant has 9.9 employers over the course of his or her career, according to the Employee Benefit Research Institute. That means every year, 14.8 million Americans with workplace retirement plans move on to new jobs.

Unfortunately, their savings often don't move with them. Many workers forget to roll over their old retirement plans into their new ones, leaving a trail of forgotten 401(k)s behind them. The research firm Capitalize has estimated that there are approximately 24.3 million of these "lost" 401(k)s in the United States, holding about $1.35 trillion in assets.

"As American workers are very mobile and are moving around from employer to employer, they're leaving behind balances in 401(k) plans," said Dave Stinnett, the head of strategic retirement consulting at the financial services firm Vanguard. "It's important that those balances find a way to follow the worker and get consolidated."

Even worse, many Americans simply cash out. Almost half of U.S. workers — 41.4% — withdraw money from their 401(k)s when they change jobs, according to a recent study by the UBC Sauder School of Business. Of those who do this, 85% drain the whole account.

"Changing jobs is never a good reason to cash out a 401(k)," said Jeremy Bohne, a financial planner in Boston and the founder of Paceline Wealth Management. "Unless you urgently need to use the money, such as for financial hardship, the primary effect of cashing it out is increasing your tax bill. That's not generally a good idea."

How can wealth managers help? What are the best ways to guide a client through the rollover process, or to track down their long-lost 401(k)s? And perhaps most importantly, how can an advisor talk a client out of cashing out their plan?

Here are some tips from financial advisors across the country on the art of the rollover:

Keep digging

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First comes the world's least exciting treasure hunt: tracking down old retirement plans. Clients sometimes don't know how much they saved at a previous job — or even that they'd been saving at all. Tammy Wener, the co-founder of RW Financial Planning in Lincolnshire, Illinois, says even the most basic questions are worth asking.

"If a client seems somewhat financially disorganized, I have been known to ask them about all of their prior employers and if they recall contributing," Wener said. "A couple of times over the years, a client didn't even realize they had been contributing because of the auto-enroll and were surprised to learn they had small balances in accounts."

Many wealth managers say the best way to start the search is to call the client's old employers. It "takes patience," Wener warned, but an H.R. or benefits department can usually point you in the right direction.

"A quick phone call will usually get us on the right track," said Ron Strobel, the founder of Retire Sensibly in Meridian, Idaho. "Otherwise the client is going to be digging through their records and often they won't be able to find any documentation."

When all else fails, advisors can also search 401(k) databases, such as the National Registry of Unclaimed Retirement Benefits and the National Association of Unclaimed Property Administrators.

Get everyone on the phone

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It may be old-fashioned, but sometimes the best way to get a rollover rolling is with a simple conference call. Strobel says the key is to get the client and the plan provider on the phone together. That way they can learn important details as they come up, rather than searching through statements that may or may not include them.

"I prefer to do rollovers over the phone rather than online or by paper when possible," Strobel said. "It allows us to easily ask the rep on the other end of the phone if there are after-tax contributions, Roth contributions, etc. in the account."

Before the call, Strobel always makes sure both he and the client are prepared. First, he finds the plan provider's number ahead of time so the client doesn't have to "dig" for it. Second, he gives the client a preview of the questions the provider will probably ask — including basic ones like the client's personal information, but also more obscure details, like whether they've seen the plan's tax disclosure notice.

"The tax notice usually throws clients off, so I always explain that beforehand," Strobel said.

Be careful with those checks!

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After the rollover is requested, the previous plan provider typically mails a check to the client, who then needs to forward it to their new provider within 60 days. It's a clunky, old-fashioned procedure, and vulnerable to small errors — missing the deadline or simply filling out the check wrong can derail the whole process.

Noah Damsky, the co-founder of Marina Wealth Advisors in Los Angeles, is familiar with these "simple yet expensive mistakes." To avoid them, he does as much of the work himself as possible. The goal, he said, is to "create a process that makes it easy for clients."

"We give clients a prepaid envelope that they can drop their check into when received," Damsky said. "We're on the call with them and the administrator of the 401(k) so we can ensure the check is correctly titled … We're there every step of the way so they avoid stepping on the landmines."

Talk clients off the ledge

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If a client is considering cashing out a plan, they may not know how much they risk losing. The IRS imposes a 10% penalty on 401(k) savers who take distributions before age 59½. On top of that, the money withdrawn is subject to income taxes, which are likely higher at that stage of the person's life than they would be during retirement. In any case, early withdrawers miss out on whatever growth their investments would have enjoyed if they'd been left in the plan.

Financial advisors can help clients understand all this — especially if they lay out the costs in dollars and cents.

"We discuss the consequences of cashing out," Damsky said. "In a state with high income taxes like California, clients can easily lose 45% or more to penalties and taxes, which has been an eye-opening number when put into dollar amounts instead of percentages."

At the same time, Wener pointed out, it's important to hear out what the client is thinking before sounding the alarm. Listening attentively will not only help the advisor understand the situation, but could make the client more receptive to advice.

"Understand that sometimes clients have very good reasons for wanting to cash out," Wener said. "It's our job to listen without judgement and then guide them appropriately."