401(k) to 401(k) transfer questions

[statsman]

When a company decides to switch from one investment firm to another to manage their 401(k) plan and accounts, what happens to the monthly dividend payouts for the bond funds if the transfer occurs before the end of the month?

Let's say you have funds in Vanguard's Total Bond fund that are being transferred, and the transfer occurs after the 20th of the month (for a 30-day month). I would have assumed that the distribution for that month would have been prorated at the end of the month by 20/30 and would show up later. Or is this for something else?

 

[OldShooter]

Not hampered by any direct experience here, but if the fund shares are transferred in kind then it would seem that the usual payment would be made by the fund on the usual day. If the old custodian got it after the transfer, then they would simply transfer it to the new custodian. No prorating necessary as you owned the shares the whole time. To you, this should all be invisible.

That’s the way it works when transferring in kind between IRA custodians.

 

[statsman]

Hmmm, not sure that answers my question. Maybe I'm being too vague. I hate giving out specifics online, but I will try to generalize.

A Vanguard GNMA fund in DW's 401(k) with the old investment firm was cashed out (by them) on March 30 in order to transfer the funds to the new 401(k) investment firm. Those funds were reinvested back into Vanguard GNMA on April 1 (so, out of the market for two days).

On March 31, Vanguard paid a dividend on this fund. My understanding is DW was entitled to 30/31 of the March 31 payout (or whatever daily accrual there might be through the 30th) that would have made it's way to the new investment firm.

Looking at the closing statement from the old investment firm, the total YTD dividends paid on the Vanguard GNMA fund was the total of the January and February 2021 monthly dividends. Nowhere in the balance sent to the new investment firm was the prorated amount for March 2021. And no additional transfers between the investment firms took place in April 2021.

The question becomes is DW entitled to a prorated dividend for March 2021? And yes, we've called the old investment firm and they are investigating, but their initial response is not giving me a warm fuzzy. I also think this is something that would have been planned for or at least caught during the post-transfer audit performed by the old investment firm.

Seems like this would be a similar situation to someone moving an IRA from one investment firm to another.

 

[OldShooter]

Yeah, that's different. If we were talking about an actual bond, accrued interest is part of the sale proceeds. But I don't do bond funds, so can't help. Maybe call VG? Or tt the new investment fund; they have a fiduciary obligation to her. I'm fairly sure that somehow she has been paid or will be paid.

 

[Dash man]

Dividends are paid out on a given date and the price of the fund is adjusted accordingly. If you liquidated the fund prior to that date you sold the shares at the higher price.

 

[statsman]

Dividends are paid out on a given date and the price of the fund is adjusted accordingly. If you liquidated the fund prior to that date you sold the shares at the higher price.

That's not how Vanguard GNMA and many other Vanguard bond funds work. The price of the fund is not adjusted for any paid dividends (interest).

 

[Dash man]

That's not how Vanguard GNMA and many other Vanguard bond funds work. The price of the fund is not adjusted for any paid dividends (interest).

Then I’m sure the interest will find its way into your account. Give them a few weeks unless you need the money now, then give your fund manager a call.

 

[statsman]

Then I’m sure the interest will find its way into your account. Give them a few weeks unless you need the money now, then give your fund manager a call.

Well, it's been almost five weeks since the original 401(k) was cashed out and closed. I think that's plenty of time for them to have figured this out, but with our contact today, they've asked for 1-3 days to investigate.

I honestly think they've screwed up. I'm just trying to get some sort of confirmation of how I believe this fund works with regards to paying monthly dividends for part of a month (in this case, 30 of 31 days) is correct.

 

[Out-to-Lunch]

As Dash man says. Here is a longer explanation on Bogleheads: https://www.bogleheads.org/wiki/Dividend#Dividend_distributions_and_fund_prices

Edit: I posted this before your post #6. Perhaps not relevant for your situation.

 

[statsman]

As Dash man says. Here is a longer explanation on Bogleheads: https://www.bogleheads.org/wiki/Dividend#Dividend_distributions_and_fund_prices

Edit: I posted this before your post #6. Perhaps not relevant for your situation.

It isn't. From the link:

The fund is required to make such a distribution, and the fund is required to decrease the net asset value (NAV) accordingly, as after the payout the fund holds less wealth. This is true of most equity funds, but not of bond funds.

That last part applies to the Vanguard GNMA fund.

 

[Dash man]

I just looked at how some of my dividends were transferred when my accounts moved from USAA to Schwab last year. There were journal transfer entries labeled as external transfers from USAA to Schwab. There were several over a six week period after the move. The money was not identified to the individual stock or ETF. The USAA 1099s were correct showing dividends for the stocks.

 

[MRG]

I just looked at how some of my dividends were transferred when my accounts moved from USAA to Schwab last year. There were journal transfer entries labeled as external transfers from USAA to Schwab. There were several over a six week period after the move. The money was not identified to the individual stock or ETF. The USAA 1099s were correct showing dividends for the stocks.

I think that makes sense. The distribution is handled by the system of record where the security is registered. If the shares are registered by name it's going to find you sooner or later depending on the date. For shares in the brokerage name they already sub-distribute that out and it's going to eventually find you from that process.

 

[statsman]

A phone call with Vanguard this morning confirmed that the Vanguard GNMA fund (VFIJX) does accrue interest daily. Since it was sold while held with the original investment firm, they should have received the prorated (30/31) interest for the month of March, and that amount should have been forwarded to the new investment firm.

My contention is the dividend transfer should have happened during the 401(k) blackout period that extended through most of April 2021. I also have to believe my DW is not the only employee/ex-employee that this has happened to.

 

[statsman]

Update:

We don't know the specifics at this time, but it looks like our complaint may have finally found the right sources to resolve this issue. It would appear that the ex-company, the old investment firm (Newport), Vanguard, and the new investment firm have been involved with auditing our complaint.

We're being told that a wire from the Vanguard GNMA fund has been sent for the prorated March 2021 dividends, which I assume would go to Newport first. Newport needs to determine which portion of this wire goes to which 401(k) accounts. This will be passed along to the new investment firm to finally reach my wife's new 401(k) account. Once that is done, we will immediately initiate a rollover into an IRA and be done with this.

 

[statsman]

Final Update:

We were able to get the funds moved from the new 401(k) account to an IRA rather easily. We stayed with the new investment firm (Fidelity), which made this rather painless.

Funny thing. When the rollover occurred at Fidelity from the 401(k) account to the IRA, which was done before the end of May, Vanguard sent Fidelity the entire Vanguard GNMA fund value along with the prorated dividends for the month of May.

Which begs the question: Why in the heck didn't this happen between Vanguard and Newport back in March when the funds were sold to be moved to Fidelity? Is it possible Fidelity indicated to Vanguard that the sale was for an account closure, while Newport didn't indicate that?

Whatever the reason, so glad DW's 401(k) is no longer at Newport, and even more glad her investment is now in an IRA.