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INVESTORS ARE OFTEN told that it’s impossible to consistently time the market. To do so successfully requires you to make two correct decisions: when to get out of stocks—and when to get back in.
In 2022, J.P. Morgan published a study showing that a lump sum invested in the S&P 500 over the 20 years through 2020 would have earned an annualized return of 5.2% if you’d missed the 10 best days, versus 9.4% if you’d stayed invested throughout the period. Miss the 30 best days, and your annualized return would have dropped to 0.32%.
Unfortunately, I may have suffered something similar.
I’m very much a buy-and-hold investor. The vast majority of our portfolio is in index funds that we’ve owned for decades. In the past, I’ve written about the few individual stocks that we own. We’ve also held these positions for decades.
I retired two years ago. Earlier this year, I thought that it was finally time that I roll over my 401(k) to my IRA. Some people make this switch because the funds in their employer’s 401(k) charge higher fees than are available in an IRA. Fortunately for me, that was not the case. My previous employer had consistently done a good job of minimizing costs. Instead, I wanted to reduce the number of financial institutions that my wife or other heirs will have to deal with after my demise.
Although I could initiate the rollover electronically, I was surprised that both firms in the transaction wanted to use a paper check. A wire transfer wasn’t an option. On top of that, a check made out to the IRA sponsor would be sent to me, and I was then responsible for forwarding it.
The only reason that I can fathom for doing it this way: Both firms wanted me to look at the check and make sure it was going to the right account. This could prevent any misunderstandings, such as having a traditional 401(k) rolled over into a Roth IRA, thereby triggering a large tax bill.
The upshot: I ended up being out of the market for 21 days, even though I sent the check for next day delivery when it reached me. During those 21 days, my portfolio would have gone up 4.9% had it been fully invested.
I do believe markets are random in the short term. If the investments I sold and then repurchased fell 4.9% during those 21 days, I’d have been singing the Hallelujah chorus. Instead, I feel a bit like Emmett Kelly’s character Weary Willie. Still, there are lessons here for readers: You can’t time the market—and sometimes you find yourself out of the market even when you don’t want to be.
If you have another tax-deferred account, you might be able to temporarily move some assets in that account to stock funds in order to stay in the market to your usual extent while you are waiting for the transfer from your 401(k) to IRA to take place. I did something like that recently my TSP account when we bought a new house a couple of months before selling our old house. I guess you could do that in a taxable account also but you would have to worry about capital gains and losses.
Sorry to hear that this happened to you.
My 401k had great ultra low cost funds and I would have been happy to leave my funds there, but when I retired, I was able to make good use of the Net Unrealized Appreciation strategy with employer stock (for those not familiar with this, you are able to have shares of employer stock distributed to you in a taxable account at cost. To the extent you have tax-paid funds in your 401k, you can remove company stock tax free.) I was with the same company for almost 4 decades and had a lot of very low cost basis shares. I then donated those to a donor advised fund, getting a deduction while still in a very high bracket and never having to pay capital gains. NUA is considered a distribution, which triggers the obligation to fully distribute the 401k within the calendar year.
Even though this strategy was very profitable, I was very uneasy while I awaited the paper checks (TIRA & RIRA) from the custodian of my 401k. It only took about a week, and I went straight to our local Schwab branch as soon as they came. I was lucky that the market moved sideways during that period.
The financial firms have no incentive to move faster. Many of the checks they are sending are big, and they want to double and triple check everything before they do. And by putting you in the middle of it, they can reduce fraud.
I looked at buying options for protection, but deemed it too expensive. In-kind transfers would help in most cases, though in mine the equity funds were proprietary (simple index funds with lower fees than Vanguard’s) so you had to cash out for distributions.
Perhaps a bit off topic, But worth mentioning when 401(k) to IRA rollovers are being considered. One of the benefits of holding tax-qualified funds inside a current (or former) employer’s 401(k) is that they are provided an added layer of protection (under the rules of ERISA) against seizure from creditors and are protected from seizure related to civil suit judgements.
This protection, in and of itself, may not be sufficient enough of a reason to leave your retirement assets inside a former employer’s qualified plan. Indeed, your investment option choices inside the 401(k) may not be optimal during your retirement and setting up periodic distributions can sometimes be difficult with some employer plans. In addition, the overall cost-structure charged for maintaining assets inside your former employer’s 401(k) plan may be unattractive. These are all worth factoring into the decision-making mix before pulling the trigger on a 401(k) to IRA rollover.
With that being said, the loss of protection from creditors (which is afforded under ERISA to qualified employer-sponsored plans, but does not extend to personal owned IRAs) is certainly something to plan ahead for. A basic overview of this topic can be found here.
My thoughts? Before transferring any sizable amount of assets from an ERISA-protected employer retirement plan into an IRA, be sure to make purchase of a Personal Liability Umbrella policy – ideally at a favorable price from your current auto and/or home insurer.
If you have already have an umbrella policy, consider increasing the maximum coverage limit to factor in the inclusion of this added exposure represented by the value of your rollover funds.
Umbrella policy limits typically run from 1 million up to 10 million, with higher coverage limits (purchased in 1 million increments) typically discounted by insurers after purchase purchase of the first million in coverage. Rates for umbrella policies vary geographically, but generally 1 Mill of coverage for a retiree with 1 home and 2 cars typically should run between $200-$400 a year, and discounts typically are offered by insurers who also cover your home and autos.
Though a liability umbrella doesn’t provide you any protection against seizure of your IRA assets due to default on your loan obligations, it will likely provide an added buffer of protection for this rollover money against major civil suit judgements against you (e.g. an auto accident by you involving death or serious injury to others, or a civil suit tied an injury sustained by others while at your home). If you have a home with a swimming pool or own one or more dogs, this is an important consideration.
Some states protect 100% of IRA: same as 401k. A 1 mill umbrella can run far higher than $400, even without kids, 2+ vehicles or any other risks if one lives in a state with high accident/litigation rates. $2 mil in coverage can cost 3x the cost of 1 mil and may not even be available. It’s amazing how states can vary.
IRAs offer some protection from creditors — currently $1.5 million — and perhaps even more under state law:
https://humbledollar.com/money-guide/retirement-accounts-2/
Jonathan – Thank you for adding clarification on IRA protections that are potentially in play outside the scope of ERISA (and for the link-back to your prior HD article on this topic).
While the lookup by state that was linked in the prior article is no longer active, It is apparent from a little digging around that each state’s law governing how much IRA assets are protected in civil actions varies quite a bit.
Notwithstanding, the added protection afforded by an umbrella policy is a wise one to consider for moderate to high net-worth households, particularly retirees. Beyond the added protection for typical auto and home related civil actions, most umbrella policies also provide added protection against “personal injury liability” litigation, which is normally not a covered item under home or auto policies.
I didn’t realize the link was broken. Try this one for state IRA protection — you’ll need to scroll down:
https://www.irafinancialgroup.com/learn-more/self-directed-ira/ira-asset-and-creditor-protection/
Vanguard is the worst to deal with with such transactions.
It is really outrageous in this age of technology that you cannot do an in-kind transfer of shares from your 401k to your IRA when both firms offer the same funds/ETFs.
I am currently waiting to roll my 401(k) to my IRA for the exact issue you describe. My current custodian and the plan rules do not allow a in kind distribution nor do they allow for any distribution other than a single lump sum distribution with the exception for the exact annual RMD amount which is mandated by ERISA. On top of that the custodian has to get approval from my former employer before they will process my rollover request. I foolishly think it is my money.
I am hoping for a period of limited volatility soon and will likely pull the trigger on my rollover when the FOMC announces they are done raising rates. This is just my best guess of when I think the market will hit a short term high and is certainly market timing. I do not see any alternative other than leave the amount with the old 401(k) custodian which I do not want to do as the old custodian charges about 30 basis points a year administrative fee, has limited investment options and the fund options have expensive fees.
I hope that groups that support individual retirement accounts will come up with a SECURE 3.0 proposal to eliminate this needless hoop jumping. I am in favor of the whole structure of company/organization retirement plans to be revised from a plan by plan, election of options to a single IRA with the same (higher) limits like 401(k) plans and the same criteria for contributions based solely on if you have earned income.
I never could understand why employers put in such rules. Just not necessary, but William, it’s technically not your money. Money you put in the plan legally is trust money, not the individuals. No doubt none of us think of it that way though.
I agree with you that the 401(k) money is legally owned by the trust because if that legal fiction did not exist the financial events inside our retirement accounts would be immediately taxable.
What I really object to are the 401(k) rules of a particular plan where the employer-trustee and the third party administrator (TPA) may create unneeded elective rules that are allowed to benefit the employer and/or TPA at the expense in time and money of the NHCE plan participant/beneficiary of the retirement trust.
I like the Superannuation used in Australia that mandates portability.
I agree.
Dumb luck! I had the opposite experience with lady luck! My employer has a stellar 401K (with a brokerage option) and I decided to roll over my IRA into my 401K. I liquidated my IRA on Feb 1st week, 2020 and reinvested the assets on Mar 1st week, 2020, and completely skipped the market drop!
This convoluted process is one of the things that can make doing Roth conversions from a 401k to Roth IRA a little trickier than it should be. One way we’ve figured out to minimize the potential damage–use some of the money in the target IRA account to purchase a roughly equal amount of stock that is being sold in the account being liquidated, thereby keeping the lag time of being out of the market to only a few days (or less). That way, all you miss is the potential earnings on cash or money market, for however long it takes your administrator to send the funds (which can be awhile). Of course, this won’t work if you are 100% in stocks, but that’s not us, so it works fairly well.
Another potential tax trap to avoid: If your company plan insists on sending you a check, make sure it’s made out to your IRA plan administrator, and not you. If it’s made out to your plan, send it on and you should be all set. If you need to do another rollover from another plan (or the same plan) within a year, you can do so without a problem.
If, however, it’s made out to you, congratulations, you’ve just used up your IRS-allotted once-per-year IRA rollover, and you will not be permitted to do another for a full year. Gotcha!
A little off topic, but… the different practices of financial firms always surprises me. A dozen years ago, I needed to close out and transfer my deceased father’s accounts. They were similar accounts at three big-name financial firms. One was settled within two weeks, another took about two months. A third dragged on for over six months. The fastest firm could not (would not?) provide a date-of-death valuation.
I recently initiated electronic funds transfers (EFTs) from my retirement account (at another well known firm) to my bank account. That took a week to establish; transfers take 2-3 working days. A second firm took two days to initiate EFTs; transfers are usually complete within a working day. The IRS, bless them, initiates and takes EFT payments on the same day!
The same thing happened to me after I retired 3 years ago. I rolled my Fidelity 401(k) and Vanguard IRA to a new Schwab IRA. Fidelity insisted on liquidation and sending a check. Vanguard transferred electronically. I was a bit uncomfortable holding a paper check in my hands.
I had the same problem transferring my 401k from Fidelity to a Vanguard IRA. It made zero sense. I concluded that Fidelity was trying to discourage transfers (I have a suspicious mind).
Ugh. We have Schwab Rollover IRAs from previous jobs and Fidelity retirement accounts with our current jobs. I was planning to roll everything to Schwab when we retire to consolidate things.
That is really unfair and unnecessary with todays administrative systems.
My 401k is administered by Fidelity when after ten years retired, I finally decided to do a rollover all I had to do was hit a button on the Fidelity website.
Consolidating other investments involved some paperwork, but not too bad.
My delay in doing the rollover was partly because I had designed and managed the plan since 1982. I felt like I was abandoning my own plan – ridiculous of course. The things that finally made me move was the desire to consolidate all investments under one roof and manageable on one website.
The other was a big annoyance. While working I had negotiated an increase in the Company match in return for plan expenses to be taken from the trust. Then a few years after I retired the Company instituted an annual fee on any account of a retired employee. It was not a large fee, but the very idea of paying twice was annoying. THE THING IS when that happened there was no one at the Company who knew about the deal I had made and when I explained it to the people then in charge I was ignored.
Probably best once out of an organization to be totally out.
My wife and I each did rollovers a few years ago, also to minimize institutions. We didn’t like the big, slow paper check, and worried about being out of the market. Thankfully, it was not a volatile time. I think one of us lost a little and other gained, but the amount was minuscule. I’m sorry your experience was not similar.