401k Plan Distribution Rights?

Apr 21, 2008 6 Replies
H

Can a 401k Plan/Plan Administrator restrict rollovers to certain types of IRA accounts? Specifically, when an employee is terminated and wants to take a full distribution/rollover to an IRA and close their existing 401k account, can the Plan/Plan Administrator say they will only allow direct rollovers to Traditional IRAs and not to Roth IRAs, even though rollovers to Roth IRAs became allowable by law on January



1, 2008? Does the Plan/Plan Administrator have that authority? Is there anything I can do to fight it? Yes, I know I can go ahead and roll the thing into a Traditional IRA and then subsequently convert it to a Roth IRA but that is the whole POINT of the new law: to prevent those additional steps. Can my 401k Plan Administrator just say (basically), "We don't feel like implementing new procedures or updating our system, so we're just not going to allow it right now because we can't produce the proper tax forms". The law has been in place for 3 1/2 months, they knew that it was coming for a looooong time before that, but they just didn't get their act together. Very, very frustrating.

It gets worse. Not only that, they want to top it all off with a $40 account closing/servicing fee. I almost died. They want $40 out of



*MY* retirement when they can't even do what I asked?!? Is that legal? Is there anything I can do to fight *THAT*??

I got lucky enough with a Google search to get the Plan Administrator's telephone number and email address (very big company - ADP - didn't think I would get so lucky). I called her up. She was familiar with the new law but not with the requirements of the Plan to which she is the Administrator(!). She thought that the Plan spells out which types of rollovers are permitted and which are not but she would have to look at the Plan documents to see and call me back. I told her my copy of the Plan Summary does not address these types of rollovers because it was written prior to 2008 and asked her to please send me an updated copy if there is one that addresses this new law. I followed up my phone call with an email to her recapping our conversation and thanking her for her time/help. It will be interesting to see if I ever hear from her again. And if I do, it will be interesting to see what she says.



Can you offer any advice or help?



Thanks! Heather


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K

Unfortunately, you are probably screwed. But, to be clear, the 401k plan administrator is not to blame. The 401k plan document is. The administrator is obligated to perform within its confines. I haven't read the new law since it was proposed, but I'm pretty certain the new law does not REQUIRE that you be allowed to rollover directly to a Roth, only that it is now an option 401k plans can provide. Whether your employer takes advantage of this new availability is up to them. If they decide to allow for the "Roth Roll" they must amend the plan document, which is neither a free nor a speedy process.

Nope. It's common. They also usually charge $50 to process loans against your own account. I've seen people go bonkers over that one! You agreed to the fees when you enrolled. They also did not make these fees up last night. They've been in disclosed and available since the plan was established, it's just that no one thinks to ask until it's too late.

There is likely not an "updated plan document". Again, the key to understanding is to know that the law is not mandatory. They don't have to allow it, and apparently they don't at this time.

P.S. - If the 401k was pre-tax money you will have to pay taxes to convert to the roth. This may or may not affect your actions, I just wanted to make sure you were aware of it.

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D

Isn't the direct Roth rollover more of a convenience thing? Heather should still be able to roll to a traditional IRA, then convert it to a Roth. I don't know that much about the new law, so there may be features I don't know about.

Brian

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D

Yes. Relax a little bit. It doesn't seem to me that having to do a two- step conversion from 401(k) to IRA to Roth IRA isn't that big a deal, certainly not big enough to get worked up over. Why do you think it is?

Dave

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P

I would second Dave's thinking here. What's the big deal? Any broker wanting your rollover account would make this a painless process.

And a $40 acct closing fee is also chump change. Not enough to work over it.

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K

Yeah I don't see any reason why not go through the 2 step process either.

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E

"Heather" wrote

Hi Heather, a fee of this amount is usual when transferring assets from one brokerage (custodian, whatever) to another and closing an account. It does take time, and this at least keeps people from transferring willy-nilly, which raises costs for all of us. Fidelity, TRowePrice, Vanguard etc. all have asset transfer and/or closing account fees like this, though occasionally they offer specials. A few years ago, USAA Investment Management Company offered reimbursement of any transfer fees a brokerage house charged for moving assets to USAA IMCO, plus they offered something like ten free stock trades, good for a year. Shop around, and maybe you can find a brokerage that will give you incentive to move your assets there. Don't count on it, but these days when banks are eager for money on deposit, it's worth a try.

As Dave and kastnna indicate, it is not a big deal to roll it over to a Trad IRA, then convert a bit at a time. What's going on here, anyway? You have just a few thousand in the account or are we talking upwards of say $10k? Do you have the money sitting outside this account to pay the taxes on this in one fell swoop?

I would cut the plan management some slack while it gets up to speed. The law for direct rollover is fairly new. That your plan currently is not set up for direct rollover is not a big deal. Plus having more efficiency and professionalism yada generally means more costs to plan participants. Maybe your plan is low cost all-in-all, and this is the tradeoff.

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