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Opportunity Knocks With Plan Rollovers

In today’s tight labor market, folks are constantly on the move. This can create important opportunities for you to assist your clients with asset accumulation and allocation.

By Janet C. Arrowood

In today’s tight labor market, folks are constantly on the move. Your clients probably sell their homes every few years, travel often, and change jobs frequently. This propensity toward restlessness, especially in the job arena, can create important opportunities for you to assist your clients with asset accumulation and allocation.

Although many of these highly mobile folks may never have accumulated assets in any company retirement plan, some have managed to stay put long enough to participate in a company retirement plan. For these folks, a tremendous need exists to manage their accounts. And for you, this creates a tremendous opportunity.

Plan Alternatives
Once employees leave a company, they have four main options for dealing with the money in their qualified retirement plans. They can leave the money where it is, transfer it to another company’s retirement plan, spend it, or roll it into a personal investment retirement account.

Your clients might want to leave the money where it is, because policies for rolling over or transferring the money to another retirement plan could be onerous and time-consuming, possibly involving lengthy delays.

However, if they choose to leave the money with their former employer, several important considerations come into play. First, any outstanding loans must be repaid immediately. Second, no further loans are possible from that account, so your clients will have no access to their money. And if the clients’ old employers change investment choices, their money could wind up being automatically transferred into “comparable” investments that may not be truly com-parable.

Also, if your clients’ old employers’ plan is not doing well, or does not offer the desired investment options, they could be stuck for several months to several years (unless they rolls the money into an individual IRA).

Your clients could opt to transfer the qualified assets into a new employer’s retirement plan, but they may not be eligible immediately for the new employer’s plan. And even if they were, that plan, unlike an IRA, might not offer loans. The new employer’s plan may also not offer the kinds of investment options your clients want, or could be restricted to company stock, which would preclude any kind of asset allocation or diversification. Consider, though, that being able to buy a company’s stock may be a great deal, particularly since there are no commissions or other charges in most cases, and in some cases, the stock is not publicly traded.

Your clients could also opt to spend the money. Situations always exist where there may be no choice but to spend their retirement account when leaving an employer. If clients, say, are starting a business, and have unexpected expenses or outstanding loans, they may need to use available retirement plan monies to cover these obligations.

However, if these situations do not exist, and clients just want the money for a dream trip or a new luxury toy, then I suggest you explain marginal tax rates, estimate the taxes due, and tell them to get out their checkbook. Tell them to write two checks-one to the Internal Revenue Service for 45% to 55% of the expected payout (before the 20% haircut by Human Resources), and one to their state for another 5% or so of the total. Most clients don’t even realize that the 20% of account value that would be withheld by Human Resources if they were to take their money is the entire tax bill!

After they get up off the floor, you’ll find most clients will change their minds about taking the money for that dream trip to Europe (or whatever). To explain how you get the number, use the previous year’s 1040 tax table. It’s a powerful tool. Take the clients’ year-to-date earnings, add in the spouse’s earnings, estimate unemployment payments or expected income from a new job, and then circle that total in the IRS tax table. Then add the amount of the retirement plan payout, and show them the additional tax due. Then add 10% of this marginal tax amount. Few clients will leave unimpressed.

I generally advise my clients to roll money from company retirement plans into an IRA, taking care to ensure that qualified money from a former employer is kept separate from the client’s personal IRA money. If your client does not want the hassle or additional expense of maintaining a number of separate IRA’s, I require a “waiver and hold harmless agreement” from the client that includes an explanation of the consequences of mingling different types of retirement monies. If your clients wish to commingle their 401(k) money with their personal IRA money, they can, but they must know that if they do so, they will most likely no longer will have the option to roll the former 401(k) money into a new company’s qualified plan.

Taking Control
I am a great believer in clients having personal control over their retirement money, for several reasons:

When people control they retirement money, reallocating it as market conditions change is a pretty straightforward process. It is not so easy with most company retirement plan assets.

If money is needed to cover expenses, assets in a personal IRA can be taken out for up to 60 days without penalty, as long as the money is returned before 60 days has elapsed and as long as money had not been withdrawn for at least 12 months prior. If, for some reason, the IRA money cannot be repaid in time, your clients will still be subject to taxes and penalties. But they will be no worse off than if they had simply taken the money from a 401(k) or 403(b) plan and not repaid it, or had cashed out of the plan when leaving the company.

Your clients can come to you for advice and guidance. There is generally little or no advice or assistance available when investing in a company retirement plan, particularly when your client no longer works at the company.

Rolling The Money Out
Some company retirement plan administrators are very easy to deal with. Many are not. Some company retirement plans have very simple procedures for withdrawing assets once an employee has left the company. Many do not.

The simplest approach is to set up a new personal IRA account for your client with your preferred custodian, and then give your client clear instructions to pass on to the administrator of the plan from which he’s transferring. All your clients should have to do is call the plan administrator’s 800 number, give their account number and password, and then request the account be closed and the entire value sent to the new custodian. The check should be made payable to “XYZ FBO Jane Smith” (XYZ being the custodian’s name, and FBO means “for the benefit of”). The check can be sent to the client or the new custodian. I like to include my client’s account number (if available) or social security number in the memo section for cross-reference purposes.

If the outgoing administrator will not generate an FBO check, I highly recommend you call the administrator and ensure you get the right forms to transfer the money to the client’s new personal IRA. Make sure to ask if a signature guarantee is required, and try to find out how much time the transfer should take. I recommend to clients that when they leave an employer, they make the transfer and get it over with, because it can sometimes be a nightmare to do the rollover. And the money will be there when your clients need it.

Advantages and disadvantages
For your clients, having their retirement assets in a personal IRA has many advantages, but also a few disadvantages.

The advantages are: Your client gets your services; your client gets access (although limited) to his or her money; your client gets access to thousands of investment alternatives; and your client (or you) can make changes quickly, in response to market conditions.

As for disadvantages, I can really think of only one: If your client has commingled the qualified money with her personal IRA to save fees, she probably can’t undo it to roll it into a new qualified plan.

There’s a great selling opportunity out there…go for it!

Janet Arrowood is managing director of Investment Decisions, Inc., in Denver, a provider of advanced business and estate planning for business and individuals. She is a registered representative and has written for various business and legal media. She can be reached by phone at 303-567-0996.


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