The American retirement system needs a plumber. Everything is built so the pipes don’t connect.
That’s how Lew Minsky of the Defined Contribution Institutional Investment Association, a group representing the 401(k) industry describes it. Workers hop from job to job, collecting 401(k)s and individual retirement accounts (IRAs) along the way. Rolling those assets into one convenient account can be a full-time job of its own, since the companies that run 401(k) plans and sell IRAs all use different systems.
Here’s what happened when I tried to roll a 401(k) at a former employer’s plan into an IRA.
It took visits to three websites and two phone calls — which were only answered during business hours — before a letter and check were mailed from the 401(k) plan. Yes, that’s a paper letter and check, sent through the U.S. Postal Service. Then, when the money finally arrived at the IRA provider, it took two more calls, totaling 23 minutes, before the firm was able to invest my money.
The whole process took two full weeks, which happened to be an unlucky time to have my money out of the stock market. I missed a 6% rise in the S&P 500 and a 10% jump in emerging markets.
That was nothing, the experts tell me. For most people, Michael Kreps of Groom Law Group in Washington said, “it’s too complicated and difficult to do the rollover themselves.” An expert on retirement policy, Kreps was able to find a way to roll over his old 401(k) into an IRA. But only after a series of bureaucratic mishaps. He needed to ask his former employer for forms and a letter, and he had to visit a bank to get a special form. “I’m a pension lawyer and it took me forever,” he said. And a 401(k)-to-IRA rollover is easy compared to the near- impossibility of a “roll-in,” moving money from an old 401(k) to a current 401(k).
So Americans end up with 401(k)s and IRAs all over the place, some with tiny balances. This isn’t just a hassle that makes it harder to plan. Stranded accounts are also hurting Americans’ retirement security, the U.S. Government Accountability Office recently warned.