401k rollover - transferring SHARES instead of liquidating

[ea1776]

So I will likely be switching employers soon, which means I want to rollover my 401k to Fidelity, since Hewitt charges $100.00 per year in maintenance, as well as $20/trade. The unfortunate part about this is I must liquidate all of my holdings before transferring cash to the new Fidelity account (then I have to purchase the funds all over). This process will take between 4-8 days, which means I will not have market exposure during that time. This is very worrysome to me, as history has shown huge swings can happen in a matter of a day or 2 (obviously in either direction). I guess I'm not necessarily looking for a solution (b/c I'm not sure there is one), but just venting my worries.

One thing I'll look into is transferring a little bit at a time, sort of dollar-cost-averaging out of the old brokerage and into the new brokerage, but I'm not sure if they'll go for that.

[jIM_Ohio]

If you have $40,000 in 401k, when you transfer to rollover, you will have $40k

In the grand scheme of things, if 8 days of market activity ruined your retirement plan, your plan wasn't very good to begin with.

[ea1776]

If you have $40,000 in 401k, when you transfer to rollover, you will have $40k

In the grand scheme of things, if 8 days of market activity ruined your retirement plan, your plan wasn't very good to begin with.

Your statement at first glance sounds reasonable, however the facts tell a different story. Well, OK, it's not going to "ruin" the retirement plan, that's pretty strong language and obviously not what my OP implied...

Let's look at a real world example.

Say, Bill plans to retire in 2050. Being the "hands off" type of investor Bill is, he invests in Vanguard's 2050 Target Retirement Fund VFIFX. A pretty decent plan, right?

On March 6th, 2009, Bill has $40,000 in his 401k, invested completely in VFIFX. Since Bill is switching brokerages he liquidates the account and applies for a transfer to a different brokerage. This results in a sell of VFIFX shares at $11.88. In 2 business weeks, his $40k arrives in his new brokerage account. However, now VFIFX is selling at 13.27. Therefore when he buys back into it, he has obtained a loss of 11.5% or roughly $4,600.

I suppose this doesn't sound like a whole lot. But now, let's assume Bill can get a rather modest annual 8% return until he retires in 2050 (assuming no further contributions for simplicity)....

RETIREMENT BALANCE in April 2050
$40K starting capital - 938,499.33
$35.4K starting capital - 830,571.91

Compounded impact of loss = ~$108,000.00

Although I admit, this type of thing happening is extremely unlikely. The point of this real world example is to further illustrate the point in this thread and the risk involved with this type of thing. Obviously, Bill would have rather dollar cost averaged out of and back into this fund. Not to mention, I'm invested far more aggressively than Bill.

[jIM_Ohio]

Your statement at first glance sounds reasonable, however the facts tell a different story. Well, OK, it's not going to "ruin" the retirement plan, that's pretty strong language and obviously not what my OP implied...

Let's look at a real world example.

Say, Bill plans to retire in 2050. Being the "hands off" type of investor Bill is, he invests in Vanguard's 2050 Target Retirement Fund VFIFX. A pretty decent plan, right?

On March 6th, 2009, Bill has $40,000 in his 401k, invested completely in VFIFX. Since Bill is switching brokerages he liquidates the account and applies for a transfer to a different brokerage. This results in a sell of VFIFX shares at $11.88. In 2 business weeks, his $40k arrives in his new brokerage account. However, now VFIFX is selling at 13.27. Therefore when he buys back into it, he has obtained a loss of 11.5% or roughly $4,600.

I suppose this doesn't sound like a whole lot. But now, let's assume Bill can get a rather modest annual 8% return until he retires in 2050 (assuming no further contributions for simplicity)....

RETIREMENT BALANCE in April 2050
$40K starting capital - 938,499.33
$35.4K starting capital - 830,571.91

Compounded impact of loss = ~$108,000.00

Although I admit, this type of thing happening is extremely unlikely. The point of this real world example is to further illustrate the point in this thread and the risk involved with this type of thing. Obviously, Bill would have rather dollar cost averaged out of and back into this fund. Not to mention, I'm invested far more aggressively than Bill.

If 100k prevents you from retiring, your plan is not that good. It is 10% of the balance in the example, but I still stand by that 8 days of a 10,000 day investment will not impact the overall result of success or failure.

You DCA because you either are too risk averse to invest all at once, or you DCA because you don't have the money to invest all at once.

DCA works well in a down market, in an up market lump sum works better.

If you arrange for a direct rollover, it's possible the money is only out of the market for one day.

[ea1776]

If 100k prevents you from retiring, your plan is not that good.

Well, I never said 100k would prevent me from retiring, but certainly you could agree that it stings a bit. And obviously it could be a lot more, this was for a 40k example. What if someone is rolling over 5 million (I'm not, just saying...)

You DCA because you either are too risk averse to invest all at once, or you DCA because you don't have the money to invest all at once.

I'd have to kindly disagree. There are many uses for DCA. You can use it (and probably should when in retirement) for selling too. Also, I would rather DCA if I had a lump sum than invest it all at once. We could come up with examples where either one is better in hindsight, but I believe DCA helps eliminate risk.

If you arrange for a direct rollover, it's possible the money is only out of the market for one day.

Uhhhh, I wish. I use a self-directed brokerage, so I have to do a few steps:

1. Liquidate assets in self-directed brokerage and in employer account.
2. Transfer cash from self-directed brokerage to employer account.
3. Transfer cash from employer account to Fidelity.
4. Purchase holdings again through Fidelity.

Another problem I haven't thought about is some of those funds will charge me for liquidating earlier, which may be another point for DCA'ing out of the holdings (so the newer shares have time to pass the early redemption date).

[jIM_Ohio]

Uhhhh, I wish. I use a self-directed brokerage, so I have to do a few steps:

1. Liquidate assets in self-directed brokerage and in employer account.
2. Transfer cash from self-directed brokerage to employer account.
3. Transfer cash from employer account to Fidelity.
4. Purchase holdings again through Fidelity.

Another problem I haven't thought about is some of those funds will charge me for liquidating earlier, which may be another point for DCA'ing out of the holdings (so the newer shares have time to pass the early redemption date).

Paralysis by analysis

8 days does not make a big difference whether it be 40k, 400k or 4 M. If 8 days made a difference, no one would ever feel comfortable retiring.

Have you verified the above analysis with Fidelity? Ask them if they can do a direct rollover of a brokerage account?

You are analyzing this problem too deeply- there are too many variables you have no control over, and in the end game, 8 days makes no difference to retirement result at end.

[ea1776]

Paralysis by analysis

8 days does not make a big difference whether it be 40k, 400k or 4 M. If 8 days made a difference, no one would ever feel comfortable retiring.

Have you verified the above analysis with Fidelity? Ask them if they can do a direct rollover of a brokerage account?

You are analyzing this problem too deeply- there are too many variables you have no control over, and in the end game, 8 days makes no difference to retirement result at end.

Yeah, I verified the process on both ends (former employer account and Fidelity). It's not Fidelity's issue, it's the sending end's requirements that are taking a lot of time.

I do tend to over-analyze things, I'll admit. Also, I think the market has a bigger chance of going down quickly than going up quickly (which would "benefit" me for this case since I could buy back shares for a cheaper price).

I do have to politely disagree that "8 days does not make a big difference". In my humble opinion, it could matter quite a bit (as the example above shows). I don't feel comfortable going 2 weeks with no market exposure. Anyhoots, I'll probably bite the bullet and do the lump sum.

[jIM_Ohio]

Yeah, I verified the process on both ends (former employer account and Fidelity). It's not Fidelity's issue, it's the sending end's requirements that are taking a lot of time.

I do tend to over-analyze things, I'll admit. Also, I think the market has a bigger chance of going down quickly than going up quickly (which would "benefit" me for this case since I could buy back shares for a cheaper price).

I do have to politely disagree that "8 days does not make a big difference". In my humble opinion, it could matter quite a bit (as the example above shows). I don't feel comfortable going 2 weeks with no market exposure. Anyhoots, I'll probably bite the bullet and do the lump sum.

Try this
liquidate assets from brokerage to normals funds in 401k
then do direct rollover
and cut the 8 days down to about 2

[ea1776]

unfortunately, it's not that simple. Since I use a self directed brokerage (which is outside the "normal" retirement savings employer window), I have to go through all those steps. I can't transfer non-Hewitt mutual funds to Hewitt mutual funds without first liquidating the non-Hewitt mutual funds. And I know from experience that all of this is going to take some time, my 8-day estimate is probably optimistic. I hope it happens quicker than I expect.

I was thinking since I have to liquidate, maybe it'd be a good time for a Roth conversion, but I haven't really looked into that. Not sure it would make sense, because I'm well into the 25% tax bracket.