$1.35 trillion. In today’s world of stimulus packages, even this number has not been relegated to irrelevancy. It’s big. So you may wonder, “What does it represent?” According to recent research by Captialize, it’s the total amount of 401(k) assets that account holders have left behind at former employers.
These languishing accounts can mean diminished returns, wasteful fees, and, of course, the loss of unclaimed retirement money. Before we all get too bent out of shape, always remember that this money still belongs to the account holder (potentially you!). You don’t forfeit the account to your old employer by leaving it there, or worse, forgetting it’s there. You just run the risk of losing track of it and the difficulty of retrieving it becomes increasingly complex as time marches on.
While these accounts (which are often small) may have slipped the owner’s attention, the aggregate number in the trillions has helped achieve a rare feat. It has spurred bipartisan legislation that is now under consideration. Sen. Steve Daines (R-Mont) and Sen. Elizabeth Warren (D-Mass) have recently reintroduced the “Retirement Savings Lost and Found Act of 2021.” Lest you thought the Lost & Found was reserved for summer camp, it may soon be a thing for your retirement assets (or your neighbor’s if you already have your stuff together!).
As you might imagine, we would advocate for not waiting for some form of legislation to pass. The reality is that you can start taking back control of these assets now, if you are one of the many that has accounts still lingering at old employers. Don’t get us wrong, there are certain cases where leaving it behind makes sense. More often than not, however, this happens simply because of a lack of time or awareness by the account owner.
So if you are one with an old 401(k) still sitting at a former employer, here are your options:
- Leave it where it is! As mentioned above, this is a perfectly acceptable and sometimes advisable solution. If your old 401(k) offers very low fees, easy access, and a good set of investment options, you might find it in your best interest to just leave it where it is. On the other hand, the risks you run may include:
- Account maintenance fees imposed on accounts held by terminated employees.
- The Plan switches providers and you have trouble accessing your account to update your investments, rebalance your account, update your beneficiaries, and more.
- Move it to your new 401(k)! If you have changed jobs and have access to a 401(k) account at your new employer, you can roll the old account into the new one. Why might you want to do this?
- Consolidation = simplification in most cases. Just one login to remember, just one set of investments to manage.
- You may be able to lower your costs, depending on how your new Plan is structured. You may also avoid the aforementioned account maintenance fees that might be applied to the old account.
- Roll it to an IRA! Many people will choose this option as they move from one employer to the next. Here you simply move the 401(k) funds over to an existing (or newly opened) Individual Retirement Account (IRA). Why might you want to do this?
- Increases your investment options. IRAs can invest in a much broader investment universe than the more limited fund lineup offered by your 401(k).
- Take greater control. You can manage this yourself or you can open up the ability for an advisor to manage this on your behalf, potentially better matching the investment profile to your goals, values, risk tolerance, and overall financial plan.
- Potentially lower your costs, depending on how you structure your IRA and the management of it.
- Cash it out. Yes, it is an option. However, it should be the option of last resort, especially if you are not yet 59-1/2 years of age. If you are younger, this option will entail both taxes and early withdrawal penalties. If you are older, the penalties go away – but it might be a sub-optimal means of tapping you resources over the long-term. However, in some cases of job transitions, especially when that transition was unexpected and/or unwanted, this may be a lifeline you simply cannot ignore.
What is right for you may very well be different from what is right for the next person we talk to. There are a number of complexities that may come into play, depending on your circumstances (liability/creditor protection, required distribution rules, etc.). Whatever option you are considering, we are here to help with advice that will always be personalize and in your best interest. Please reach out to us, whether it is simply to mull over your options, locate the account*, figure out how to fill out the necessary paperwork, or more.
*Did you know that if your account balance was <$5,000 when you departed your old employer, there is a very good chance the account has been removed from the 401(k) Plan and transferred to an IRA in your name? This provision in 401(k) Plans helps to lower administrative costs and regulatory hurdles for the Plan Sponsor (the employer). Your old employer can help direct you to where this IRA is located, and you can then handle these assets much the same way you can with the four options listed above.