Few procedures cry out for the aid of a financial advisor more than the 401(k) rollover. The laborious process, which typically involves calling up plan providers that mail out paper checks, would be difficult for almost anyone without the help of a professional — and mistakes can cost thousands of dollars.
But it’s also highly important for a secure financial future. Americans change jobs frequently, so rollovers are crucial to building their retirement savings. The average 401(k) participant has 9.9 employers over the course of his or her career, according to the Employee Benefit Research Institute. That means every year, 14.8 million Americans with workplace retirement plans move on to new jobs.
Unfortunately, their savings often don’t move with them. Many workers forget to roll over their old retirement plans into their new ones, leaving a trail of forgotten 401(k)s behind them. The research firm Capitalize has estimated that there are approximately 24.3 million of these “lost” 401(k)s in the United States, holding about $1.35 trillion in assets.
“As American workers are very mobile and are moving around from employer to employer, they’re leaving behind balances in 401(k) plans,” said Dave Stinnett, the head of strategic retirement consulting at the financial services firm Vanguard. “It’s important that those balances find a way to follow the worker and get consolidated.”
Even worse, many Americans simply cash out. Almost half of U.S. workers — 41.4% — withdraw money from their 401(k)s when they change jobs, according to a recent study by the UBC Sauder School of Business. Of those who do this, 85% drain the whole account.
Read more: Are automatic rollovers the way of the future?
“Changing jobs is never a good reason to cash out a 401(k),” said Jeremy Bohne, a financial planner in Boston and the founder of Paceline Wealth Management. “Unless you urgently need to use the money, such as for financial hardship, the primary effect of cashing it out is increasing your tax bill. That’s not generally a good idea.”
How can wealth managers help? What are the best ways to guide a client through the rollover process, or to track down their long-lost 401(k)s? And perhaps most importantly, how can an advisor talk a client out of cashing out their plan?
Here are some tips from financial advisors across the country on the art of the rollover: