One of my duties as a CRPC is to assist people with rolling over their 401k plans when they change jobs. More often than not, this is a pretty simple conversation to have. I explain how they are able to transfer the funds to another qualified plan and avoid any taxes or penalties. Usually, that is all anyone needs to hear. They hate taxes, and hate penalties, so the decision is simple. Well, today I met someone that didn’t quite grasp this concept.
Not that I was surprised to encounter someone who didn’t understand all of the options, but her reasoning was what surprised me, especially since historically she was very good at giving the max 401k contribution. The conversation we had follows.
“Don’t Even Ask About Rollovers, I Don’t Want to Hear It”
When I answered the phone, I was shocked to hear someone jump right into their request. The first thing I heard was:
Hi, my name is Jane Doe, and I’ll be leaving the company in a few weeks and I want to cash out my 401k. Don’t even ask me about a rollover, because I don’t want to hear it.
Not a problem, as I could assist her with the request. So, I explain the process and let her know what steps she will need to take, and how long to expect everything to take. . Nothing very complicated when doing a distribution, and she was pleasantly surprised that I wasn’t giving her a hassle about it. She only has to wait until her actual termination date before anything can be done. Of course, I was still curious as to why she was so adamant about not doing a rollover–so I asked.
It is a Calculated Risk
Even though she told me not to ask, I still wanted to know why she insisted on throwing more than 30% of her money away at age 42 when she didn’t have to, and her response confused me. She said that by cashing out early, she knew exactly how much money she was going to lose. The roughly 25% to ordinary taxes, and another 10% for early withdrawal. She was proud to call this a “calculated risk.” She must have just heard this term in a movie, book, or on TV, because she was using it wrong.
I told her that taking the early withdrawal wasn’t a risk, but it was a guarantee that she would lose unnecessary money. She responded by saying something to the effect, “of it was better to know how much you’re losing than to possibly lose more.” Okay, I guess you could say that losing 30% vs. 50% would be a better option, but what are the chances of losing half of your money?
It Happened the Last Time I Rolled Money Over
Finally, the truth begins to unfold. Her “calculated risk” was based on the fact that she somehow managed to lose nearly 50% of her old 401k when she rolled it over. But how do you lose money rolling over a retirement plan? Well, you don’t, unless you’re this woman who had the unfortunate timing of rolling over her account in 2000. Apparently her incredible $40,000 account had such an impact on the stock market that when she rolled out of her previous plan, the whole stock market tanked that year.
She insisted that it was the act of rolling the money into a new account that was responsible for the losses, and refused to entertain the notion that everyone invested heavily in equities lost a significant amount of money during that same period. She then repeatedly told me that she doesn’t trust retirement plans, and she would lose half of her money if she rolled it over again, so she was satisfied with only losing about 30% instead of 50%.
I Wish This Was a Joke
I really wish that I could tell you now that this was all a joke or a made up story, but it is not. Sadly, it is stories like these that make me realize how important it is for people to take some time to educate themselves about personal finance so that mistakes like this don’t continue to happen. Either way, I did my best, and since she can’t move her money for a few more weeks, I’ll have one more opportunity to talk to her when she calls again to request the forms. Maybe between now and then she will see, hear, or read something that changes her mind.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
What to do if prior employer won't sign the papers to release your 401k plan due to a falling (confronting office mgr) on unethical business prior to leaving the company after 10 yrs of employment. I was fully vested and part of my 401k was from a job prior to that. I have become eligible in my new place of employment and would like to roll it over however she won't release it! What steps can be taken?
Looks like she was the smart one...I wish I hadn't rolled mine over, I could have paid off my mortgage with that money, and not be struggling now. Hope you learned your lesson. She had great instincts.
Am davidson from africa, am looking for someone who want to invest his or her into meanful something.....don't wait to let me know now...
A 401k rollover & self directed ira is moving your eligible retirement funds, such as money invested in plans like a 401k.
I just looked at your RSS feed and it gave me an error. Can you post your RSS feed url when you have a chance? I don't check email very often.
your kinda a pompas ass to assume she is wrong in her thinking ? my wife left her job after 18 years (walmart) and had to wait 30 days for her rollover in between that time her fund fell by $1,700 dollars. some of you need to climb down off that horse your sitting on and get out in the real world where people break a sweat to make that money. my guess is your all a bunch of retierd school teachers who use tip calulaters when you go out to eat at 4:30 for the early bird special.
Tom, rollovers do not count against your annual contribution limit. So, don't worry about maxing that out if you're thinking about a rollover.
i like yo know when you roll over a 401k to a ira-cd does it go against the maxium contribution for that year thank you tom
I think this is a great idea. If everyon with a 401(k) or 403(b) were to cash out, the revenue generated would go a long way to helping our economy out of this mess. The government has already put us and our grandchildren on the hook for 40k + each, this will just do our share to fix that. Now the can bankrupt us with universal healthcare so that business can compete internationally.
She really was a genius because look at what has happened to all of us experts over the last 6 months!
Unfortunately your experience touches just one area of personal finance. Other areas appear to be just as mysterious as that to some people, such as interest on credit cards. Personal finance education appears to be a hot topic right now... "learnin' these folks" on the basics. And this lack of sophistication does not reflect overall intelligence....I had a coworker (a software engineer!) who could not understand why his credit card balance didn't drop as fast as he thought based on his payments.
I had an almost-too-similar thing happen to me with an investment from a former employer that I (eventually) rolled over. I could have easily lost a lot of money but, thankfully, my father was heavily into eyeballing the stock market and he told me to just sit on it and wait.
It's funny how you can communicate things to a family member....in a manner where the point will be taken...but the same tone or mannerisms can't be used with a customer to get your point across....lol
If my father had the conversation with this woman that he had with me, she would be rolling, not cashing in :) I hated when dad used to call his little girl an idiot...lol I did anything in my power to prove him wrong...even if it meant taking his advice :)
also...Anne made a Devil's Advocate comment with another scenario that happened to me a couple of years ago. A company that I worked for was sold to another company....and then again about 8 months later to, yet, another company. Somehow things got fudged up with one of the transfers of 401K money, one involving an old-fashioned paper check and I ended up losing a little on that deal.
But, overall, and despite the arguments from people who don't believe in a retirement plan with their employer---my dad didn't start contributing until he was in his late 40s, early 50s....probably because 401K's didn't exist until then.
But, he's in his 70s now and has a hefty bank roll---all due to the stock market and his 401K. If he had relied on Social Security to carry him through, or money hidden under the mattress, his retirement years would probably be spent working at Walmart as greeter, while holding out on a waiting list for some retirement community based on (social security) income.
If this lady customer of yours still doesn't want to invest in a rollover....tell her to jot down that you prefer shopping baskets to carts and to please have them available at the Walmart door the next time the two of your paths should cross!! lol (well, that's what dad would tell her, anyway) :)
Just to play devil's advocate, it is possible to lose money in a rollover. I rolled over my 401(k) earlier this year, and my 401(k) provider would only do so by cutting a paper check. The day AFTER they cut the check, the market spiked, and the check wasn't deposited into my rollover account at Vanguard until 10 days later. In the 10 days my money was out of the market, I lost several thousand dollars. Not the end of the world of course, but it didn't feel good.
As someone who has only recently starting taking a genuine interest in my retirement funds I really feel for this woman.
She's obviously clueless, and is doing herself a major disservice long term. I hope she wasn't too invested in equities at the time she's pulling all her money out, as she'd be taking that extra loss over and above any loss she's already seen on her account due to the market downturn?
Just to add - I lost a lot more than 40K in 2000. To think that I blamed my own greed for it while it was all her doing!
"Apparently her incredible $40,000 account had such an impact on the stock market that when she rolled out of her previous plan, the whole stock market tanked that year."
Now I know why I lost money in 2000. If not for this woman's decision, I'd be able to retire now (ok, maybe not quite)... This story is even better example of correlation vs causation than pirates vs global warming.
You shouldn't take your clients' stupidity too personaly. You cannot put your head on top of their shoulders. Look at it instead as of getting free entertainment. As Eistein said - "Only two things are infinite, the universe and human stupidity, and I'm not sure about the former."
Wow, that is so sad. Unfortunately, this stuff happens all the time in all kinds of contexts. People are too quick to judge things they don't understand and it leads them to make irrational choices.
Jen, I have to confess that I once (only) did exactly what you describe your past retail customer did. Admittedly, it was on a bad math day, and after the service representative explained it to me for the 3rd time I finally got it. Just shows me that I'm not good at mental math (or much of anything) on the fly. Lot of good my high-end, expensive engineering education did for me there. ;-\
It sounds like she's still fearful based on what happened back in 2000 which has clouded her judgment. She's still reliving what happened then and not able to move past it.
Hey what can I say, Im a trained counselor so that's the angle I take from the story.
Wow, this is a sad story. Of course, part of me thinks that people who don't understand the market shouldn't be investing anyway. I also think that they should learn about it and *then* start investing, but something tells me that woman isn't particularly interested in learning.
That's the thing. There are so many "safe" alternatives that you could do with the money without paying the unnecessary taxes and 10% penalty. I briefly tried to go into alternatives, but she was quite combative and really had her mind made up.
It's too bad no one is able to sit down with her over a cup of coffee and explain the process and show her on paper how it really works. And at least convince her to invest her money in CDs or government bonds. ouch.
Wow, I feel bad for her because it's not like she's a cranky old person who's just being stubborn for the sake of being stubborn, she just doesn't get it. Perhaps you could provide her with a couple of short articles that explain the process a little more in depth and that there's no vested interest on your part other than that you want to help her do the right thing, and that you can't in good conscience let her throw her money away. In the end, if she's not willing to look at the information at least you did your part to try to help educate her (even though it's above and beyond your line of duty, I'm sure).
In a related note, I heard someone at work say that they didn't want to start investing in their 401K (which matches 50% of all contributions up to the IRS max) because it would signify them 'having to grow up'.
Wow.... Reminds of one time when I was still in retail.
A woman had purchased something using a coupon, and she was returning something. The full price was $10 or so, but with the coupon she had only paid $8. She couldn't understand why she only got $8 backs.
I spent about 10-15 minutes with trying to explain this. I used every single approach I could think of, and she just wasn't getting it. I was about to give up and just give her the $2, and then walk down to Loss Prevention and explain why I gave the money away - it was the $2 or my sanity. But, her husband showed up, looked at the receipt, and said, "Yep, that's right." Problem solved. Hubby said the $8 back was OK, so it was OK.
Steve's right - she'll only change her mind if someone she trusts tells her to.
Well, just looking the information from her time with us, by taking the distribution now and paying taxes and penalties, she would be paying roughly 42% more on taxes than if she would have not made any contributions and just paid taxes on that money as it came in. We're talking a few thousand dollars extra in total tax. Not the end of the world, but not the best idea either.
If she were to strictly save the money in an account that earned interest, it would have helped a little, but given what the rates were between now and 2003, it wouldn't have been enough to make not saving at all a wise choice. Of course, I know nothing about her income and tax situation. This lump sum distribution could be enough to tip her into a higher tax rate or something. So at one time, it may have seemed like a good idea, but without knowing all of the details, it looks as if it is going to cost more.
I also don't know if this was her intention from the onset. Maybe this was her plan all along, and simply signed up to get the match money, thinking that would offset the larger tax burden, I don't know.
I also didn't find out what she rolled her old plan into. It may be possible that she went to some sort of financial advisor/broker to do a rollover, and she could have been suckered into an expensive annuity, or some high front-load funds that when done right as the market was taking a turn for the worse, just compounded her problems. That would easily explain her rationale for not trusting another rollover if she was legitimately screwed over in the past.
And that is a good idea about using this story. I always try to incorporate real scenarios I come across to illustrate a point, and this one is a good example.
One follow-up: I know you often have that open-enrollment period at your company where you try to get people to sign up. Perhaps you could use her "middle-brow" example as a case study by which to convince people to participate: "even if you decide to withdraw early and pay the penalty, as long as you contribute enough to get the match, you'll be better off than if you never participated at all".
Get the in-plan, and then work on them and explain them how the best approach is to not cash out when they depart the company or retire early. The incremental approach to retirement plan education. ;-\
Jeremy, yes I was only asking about the comparison of since she was with your company. If she had such a bad experience with and now distrust of retirement plans, why did she sign up again with the intention of early distribution, penalty or otherwise? Would it have been better for her to pay taxes on the income up front, not get the match, and just earn 4-5% in a money market depository account?
If the deductible contributions, match, and tax-free growth even with the withdrawal penalty outweigh the non-deductible savings account, then you have to at least admit that there is some rationality (or perhaps just luck) to her approach. If she was blindly true to her don't-trust-retirement-plans maxim, she would not have participated at all and been the worse off for it. As it is, at least she has made the correct choice to overcome her distrust for the purpose of getting the match. She must see at least some benefit to tax-deferral, even if for only a few years rather than a few decades.
Perhaps she didn't make the best choice, but she also didn't make the worst? ;-\
Steve, I don't have too much info on what her prior plan was, so it is hard to say for sure. But given what she had been saving with us, the returns on those investments over the past 5 years, and the company match, she made up some ground. She was putting in enough to get the full match, which also goes into a guaranteed fund that has a very generous interest rate.
I guess depending on when she actually started investing in her retirement plan, and how much money she invested and lost, it could be possible that not investing at all could have yielded a better result. But considering the match and the performance I have seen in the past few years especially, she would have had to done very poorly in the past to offset that and the company match.
And KMC, yes, it is an interesting job sometimes. I often go back to the famous line in the movie Cool Hand Luke:
"What we've got here is failure to communicate. Some men you just can't reach. So you get what we had here last week, which is the way he wants it. Well, he gets it."
You try to educate and inform people on how to make the best decisions, but there are some people you just can't get through to.
I don't know how you do your job sometimes. Talk about frustrating. You can't save people from themselves.
She needs to be convinced by someone she trusts. She won't come to the right conclusion on her own, even when presented with additional information over the next few weeks.
Jeremy, would you be so kind as to do the math and tell us if she'd have been better off to never have made the contributions to the plan in the first place, than to have made the contribs and now pay the deferred taxes and the penalty? In that case, perhaps you could advise her to go whole hog and distrust retirement plans enough to never contribute to them at all.
That is sad. Too bad you can't convince her to roll it over and at least put it in fixed assets, or even cash. Anything would be better for her down the line than a cash out.
Obviously she's making a horrific mistake, but at the same time it's hard to blame her. The average person knows -zero- about investments, other than personal experience. In her experience, rollover = 50% loss on investment.
To us that's ridiculous of course! Taking out the money now is a guaranteed loss... but to her it just makes sense. Precisely why emotion has no place in investing.