In this increasingly mobile world, people change jobs every 5 1/2 years or so, according to the Employee Benefit Research Institute, or EBRI. They leave the old job for any number of reasons: sick of the work or the long commute, terrorized by the boss or just plain looking for better pay.
A byproduct of this exodus is the forgotten, or stranded, 401(k) plan. Using numbers from EBRI, Retirement Clearinghouse estimates that about 10 million people with 401(k) plans change jobs every year, and roughly 25% of them leave money behind in their old plan.
“If you look across the entire industry, roughly 1 out of every 4 accounts that’s sitting on a record-keeper’s platform is a ‘stranded’ account,” says Spencer Williams, president and CEO of Retirement Clearinghouse, a Charlotte, North Carolina-based provider of plan services for companies. “It’s one of those issues that is perpetual.”
Doing nothing with the plan not an option
How can savers maximize the returns for all these disparate retirement accounts?
“The longer you leave the 401(k) behind, the more the money is not working for you,” says Lena Haas, a senior vice president at E-Trade Capital Management in New York City. “It’s just sitting in old investment choices, which oftentimes no longer fit your profile.”
To get a handle on forgotten 401(k) plans, some legwork is required. Begin by calling your former employers, who are the plan sponsors. Once you’ve located your accounts and know how much is in each one, it’s time to come up with a strategy that makes sense for your unique situation and saving goals.
The last thing you want to do is cash out the money. If you do and you’re under age 59 1/2, you’ll be on tap for a 10% penalty on top of owing income taxes. And you’ll lose the chance to earn returns on the money that’s been withdrawn.
Consider a strategy that’s right for you
Each strategy has its pros and cons. Sarah Walsh, vice president of retirement solutions at Fidelity Investments in Boston, says leaving the money where it is won’t make sense for everyone. But for savers who like the plan’s investment choices or the other services, leaving it there and checking on it periodically could make sense.
If your choices are limited or you no longer have access to the plan’s tools, then a better option may be consolidating the account in your current employer’s 401(k) plan, if the new plan allows this move and if you like the investment opportunities there.
Rolling it over directly into an IRA would make the most sense for people who want access to more investments than what the company plan can give them. “IRAs typically offer you access to a wider range of options,” Walsh says.
Be mindful of fees
Regardless of what strategy you choose, check into the fees involved. You could get hit with hefty fees in a forgotten 401(k) or even in a new rollover IRA.
“If you are 30 years old and leave an account behind that had an average record-keeping fee of $70, that’s about $7,000 you are paying in fees from age 30 to 65,” says Williams of Retirement Clearinghouse. That assumes about a 5% compounded rate of return that you otherwise could have earned over 35 years on the funds used to pay the fee.