Jan 22, 2022 - Economy & Business

Why 401(k) rollovers are so annoying

Illustration of a $100 bill shaped into a reverse symbol.

Illustration: Aïda Amer/Axios

If you happened to change jobs recently, you may have tried to transfer your retirement account from your former employer into an Individual Retirement Account or your new employer's 401(k) plan. If so, you probably encountered a bureaucratic gantlet — and you're not alone.

Why it matters: Kludgey processes around retirement account transfers result in people losing track of their funds, giving up important tax advantages, or otherwise disadvantaging themselves and being less prepared for retirement.

The exact problems that people encounter vary depending on the firms involved in a transfer and some luck. But they can include:

  • Needing to make phone calls or fax documents to even start a transfer.
  • A sluggish process where the old brokerage sends a new brokerage a check in the physical mail, creating delays and risking the check gets lost.
  • More elaborate processes involving faxes and notaries and other nonsense for people just trying to hold on to their own hard-earned savings.

People therefore face a tradeoff of either dealing with these hassles every time they change jobs, or ending up with multiple small accounts at different asset managers come retirement time.

Why is it this way? There is nothing preventing asset management firms from creating more seamless rollover processes among themselves, Gaurav Sharma, CEO of Capitalize, a firm seeking to fix these problems, told Axios.

  • But in practice, money management firms have little incentive to put much effort into making it easier to transfer money to another firm.
  • "It's not to say that they're deliberately trying to keep your money in their firm, but if you have a technology budget that has to be allocated, the first thing to focus on is not 'how do I make it easy to take money out of my institution.'"

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