How to Rollover a 401k Without Going Out of the Market

When you rollover a 401k from a previous employer, most 401k providers will sell all your investments and send a check to your new 401k or IRA provider. Some 401k providers will make the check payable to “[new provider] FBO [your name]” but they will send the check to you. You then forward the check to the new provider, together with any forms the new provider requires.

Either way, your money will be out of the market from the time the old provider liquidates your investments to the time your new provider receives the check and you reinvest the money. Although I haven’t heard much talk about missing the best 10 days lately, when the stock market is going gangbusters, some understandably don’t want to miss a beat, even for just a week or two for the rollover to complete.

How do you rollover a 401k without going out of the market? If you must go out of the market, how do you make the time as short as possible?

Note I’m using 401k as a shorthand for employer-sponsored retirement plans. This applies equally to 403b and 457 plans as well.

Some 401k providers such as Fidelity or Schwab also offer IRAs. If you rollover to an IRA “in house” they will often be able to rollover the 401k assets in kind, in other words moving the shares instead of selling them for cash. I know Fidelity can do that for sure. When they move the shares, your money stays in the market at all times.

Once you have the assets in an IRA, you can transfer the IRA to your desired destination, again in kind.

This two-step process keeps your money in the market.

The outgoing IRA custodian may charge you an account closing fee. The new custodian often reimburses you for the fee. Some even give you a good bonus and free trades for bringing money over. If you are going this route, be sure to ask about the account closing fee, any reimbursement, bonus and free trades.

Once the assets arrive at your new account, you can take your sweet time in reallocating to the investments you want. The bonus and free trades will make it easy to reallocate.

[Photo credit: Flickr user robertrazrblog]

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Comments

  1. Roger @ The Chicago Financial Planner says

    Good tips but in my experience as a financial advisor being out of the market for a few days while the rollover is in process is not all that tragic. I’ve read the “best 10 days” papers and agree with the premise. What is most important in my opinion is that folks make a proactive decision about what to do with their old 401(k) when they leave a job. I’ve seen far too many people with 3-4 old 401(k)s and a “portfolio” that can best be called cluttered.

  2. Terry says

    One more thing to consider (so you’re not surprised by it): Say you have 10 Fidelity funds and transfer to Schwab IRA, Schwab may charge as much as $50 for each sale of a Fidelity fund.

    • Harry says

      Good point, Terry. In that case, you can sell the house funds in the in-house IRA and buy ETFs before moving to the final destination.

  3. Steve says

    I have never bothered doing a rollover in-kind. For when I eventually rollover my current 401(k), my employer recently switched to collective investment trusts for slightly lower expenses. CIT’s can’t be rolled over in-kind since they aren’t traded on the open market.

  4. Dave R says

    Thankfully I didn’t read this article a few years ago when rolling over my 401k. What I missed more resembled the worst 10 days. I think I “made” $3000 or so while waiting for my former 401k provider to issue a check, send it to me, and then I forward it to my broker.

    Of mine and my wife’s current 401k providers, only one would offer your option. I suppose buying on margin while waiting for the funds to be deposited is another idea.

    • Harry says

      I agree timing cuts both ways. You would’ve made even more if you didn’t reinvest right away after the rollover check arrived but waited until the market got to the bottom. You can’t borrow on margin in an IRA.

  5. harry @ 4HWD says

    I probably wouldn’t care much about the 10 days but I am starting to think about what to do with my old 401(k)’s more and more. I have one old one that is of significant amount and in 3-4 years I will have another ‘old’ 401(k) of sig. amount. Will/should open up a solo 401(k) to consolidate all but I think I’m going to wait until you do a couple more posts on it :)

  6. Leon says

    Thanks for a very useful article — the first I have seen on the subject in the financial press. When she retired last summer, we transferred my wife’s entire 401A account to a regular IRA at Vanguard, with the primary motive being to save about $580 annually on fees (over already reasonable institutional fees at Great West Financial Services) for substantially identical index funds, and to be in position to roll a portion annually into a Roth IRA. Prior to the transfer, we shifted allocations between my plan and hers (with the same employer) to keep the same overall allocation while concentrating her allocation in a way that would save the most on the expense ratio in Vanguard funds compared with the 401A, which happened to be the most aggressive equity funds (100% equity). We didn’t fully realize the potential consequences of having 100% if her account assets completely out of the market for several days before receiving notification that a check had been mailed. Fortunately, the transfer by snail mail occurred during a correction in the last week of August, and she ended up buying into nearly identical investments for $9,300 less, instead of well north of $10,000 more (approximately her annual contribution before she retired) had the transfer taken place during the market surge the following week. After risking over 15 years worth of investment fee savings to make the transfer, we were left with the shaken feeling of having successfully gotten away with picking up nickels in front of a steam roller.

    I will have to put more thought into transferring my account when the time comes. Unfortunately, I think with the 401A provider we will be stuck again with a check in the mail – so the options to reduce the downside risk of being an “accidental market timer” seem to be to make smaller transfers (perhaps directly as annual Roth rollovers) and/or to reallocate among our tax deferred accounts before the transfer to maintain our overall equity allocation while concentrating the transferred portion in fixed income investments with low volatility (stable value, cash, intermediate bonds, etc.) that shouldn’t fluctuate much during the transfer.

    • Harry says

      Leon – Thank you for sharing your personal experience. I agree with your two solutions: do it in small batches so your chances of gain and loss can even out or re-position the account to fixed income and increase equities elsewhere prior to liquidation.

  7. linda says

    Harry, one of my friends is self-employed(he’s the only employee) and has a solo 401K(can contribute more than SEP IRA). but he doesn’t like to be limited to mutual funds and want to invest in stocks. Can he rolls over his 401K into traditional IRA (already has the account)? not 59 1/2 year old yet but IRS allows open and close the plan once every 12 months?
    thanks

    • Harry says

      A solo 401k isn’t limited to mutual funds. Any such limit is only imposed by the solo 401k provider. For instance if he has the plan at Fidelity, he can invest in practically anything in a brokerage account (stocks, brokered CDs, ETFs, mutual funds, etc.). Don’t roll it over to an IRA. Move it to a provider than doesn’t limit him to only mutual funds.

      On the other hand, it isn’t necessarily a good idea to invest in individual stocks in a solo 401k — not as diversified as mutual funds. He can make a lot of money if he invests in the right stocks at the right times (Netflix in 2013) but he can also lose a lot of money if he invests in the wrong stocks at the wrong times (J.C. Penney in 2013).

  8. The White Coat Investor says

    If you’re really worried about missing a huge uptick in stocks, why not calculate exactly how much money as would be invested in stocks in the rollover. Then, in another account, sell that much in bonds and buy stocks. Then, when the rollover is complete, reverse that transaction.

    But I agree that you’re unlikely to miss much action, and that there is a decent chance having the money out of the market will save you instead of costing you money. Asset transfers seem to be getting faster and faster all the time now. I noticed some of my recent ones were less than a week.

    • Harry says

      Another account may not have enough assets to do the trade, for example when you are rolling over a 401k after a long tenure with the employer.

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