There should be a “Leave No 401(k) Behind Law.” Too many people forget to take their retirement savings with them when they clean out their desks at their old employer. Why is this so pandemic and what should you do to inoculate yourself from this potentially debilitating financial disease?
There’s a trend permeating throughout the retirement plan industry right now. Have you heard of it? It’s called “set-it-and-forget-it.” It’s generally credited with encouraging more people to save more for retirement.
That’s a good thing.
On the other hand, this same philosophy may also be responsible for people having less interest and even less awareness of their own retirement nest egg.
That’s a bad thing.
“The biggest problem with the way people treat their 401(k) retirement savings accounts with former employers is that they ignore them altogether,” says Laura Davis, a Financial Planner at Cuthbert Financial Guidance in Decatur, Georgia.
This isn’t a temporary problem. It’s chronic. Once people have “set it,” they then naturally “forget it.” How long does it usually take before an ex-employee finally notices their orphan 401(k) account?
“Typically, the employee does nothing with it,” says Wesley Botto, a Partner at Botto Financial Planning & Advisory in Cincinnati. “It sits unmanaged for years before the employee makes any changes to it.”
This apathy can have long-term repercussions for your financial well-being. “When employees have old accounts, they risk losing track of them and they lose the ability to have an overall cohesive financial plan,” says Alexandra Demosthenes, Director of Financial Planning at Investment Advisory Professionals, LLC in Boca Raton, Florida.
Believe it or not, when it comes to their old 401(k) account, ex-employees often choose a far worse alternative to ignorance. They take it with them. “Another problem, and potentially more damaging than ignoring it, is cashing it out,” says Urban Adams, Investment Advisor at Dynamic Wealth Advisors in Orange County, California. “This creates tax liabilities, penalties and untold impact to their plan for securing retirement.”
“Nothing grinds my gears more than hearing otherwise intelligent Americans tell me, ‘I’ll just cash out my old 401(k) to cover myself until I get a new job or to pay for moving expenses,’” says Gary Herman, President of Consolidated Credit in Fort Lauderdale, Florida. “They see a 401(k) as free money today instead of an investment in their future. We chide our children for not thinking about what happens tomorrow if they eat a lot of candy right now, but we don’t take our own advice as adults. Trust me, if you raid your 401(k), you face an epic stomach ache that will last the rest of your life.”
There’s a far better way to take your retirement savings with you—without the penalties, without the taxes and without harming your best interest. You simply roll it over. Do this and you increase the odds you won’t lose sight of decades-old savings when it comes time for you to retire.
“Depending on your circumstances, you should always roll your old plan into your new employer’s plan or into an IRA,” says Davis. “You would be surprised how many say they simply don’t remember if they contributed to an account and haven’t kept track of it, sometimes over more than a decade. You certainly don’t want missing money and the best way is to consolidate and simplify whenever possible.”
But, is it better to roll your precious retirement savings into your new employer’s plan or into your own personal IRA? (Or perhaps neither if you expect to be rejoining your old employer again sometime in the future.)
“Every situation is unique, so you’ll want to evaluate all the options—there are great reasons to roll your 401(k) together at your current job while someone else may find it’s best to rollover to an IRA,” says Kelley Long, Senior Financial Planner at Financial Finesse in Chicago and a member of the AICPA Consumer Financial Education Advocates. “There also may be a reason why you would leave your retirement savings at your former employer. The best news here is that this is not a time-sensitive decision unless your old employer requires that you make a withdrawal due to a low balance. In that case, this should be toward the top of your list, and you’ll want to explore the pros and cons of rolling your account to your new job versus to an IRA.”
Indeed, some will argue it’s better to leave your money in an old 401(k) plan. Still, it’s important to recognize the risks inherent in leaving your retirement savings behind.
“Often we assume the original selections we made when we started at our last company are still relevant, in terms of investment decisions, when in fact we should take a yearly look at things with our financial advisor,” says Matt Pietsch, Chief Revenue Officer for ENGAGE Talent in Charleston, South Carolina. “The best time to do this is when we change jobs.”
It’s not just a change in your personal circumstances. Your former employer might have changes of its own. As time goes by, and you move further from that firm, it only gets harder to reclaim your retirement assets.
“The old company could shut their doors or be acquired,” says Kelley Steven-Waiss, Founder of Hitch in Los Gatos, California. “It will become tedious to try to figure out what institution that account is still with. Additionally, you have the problem of forgetting passcodes or your email is no longer working. It just makes it that much more difficult. Make it a part of your onboarding or exit process!”
There’s also a risk in leaving lots of little baby retirement accounts strewn across your financial landscape. “Like anything else too much of something is bad for us,” says Raquel M. R. Thomas, CEO of Dream Catchers Corp in Columbia, South Carolina. “In the day-to-day of operating in the on-the-job space, having multiple IRA accounts could be mishandled or not handled at all due to having multiple accounts. Consolidating allows for a one stop shop.”
You can’t underestimate the value of “one stop shopping.” You shouldn’t misunderstand it, either. All it means is the ability to bring independent experts under one single umbrella. It’s easier for them, it’s easier for you and it improves your chances for success.
“Consolidating retirement savings from your old company into a single IRA account streamlines the management and administration of your retirement funds and makes it significantly easier to track and invest in the future,” says David Levine, COO at BerlinRosen in New York City. “In addition to being able to see all funds in one place, it’s easier to make changes to fund investments in one central location rather than several disjointed accounts. Additionally, consolidating into the right IRA may give you better investment options and lower administrative fees, ultimately helping you maximize your investments and get a better return.”
Eventually you’ll retire and you’ll need to roll over your retirement savings into a personal IRA. At the same time, you’ll want to have built your team of advisors well in advance of your retirement party. Why wait? You can begin this process the moment you leave your first job for your second. This will allow (and encourage) you to start working with the professionals you’ll need to work with down the road.
“It is beneficial to keep all of your retirement savings in a personal account with the help of an accountant or financial advisor as this will keep your funds safe from any change that might happen with you or the company itself,” says Sean Collins, VP of Operations at Maine Marketing Association in Portland, Maine. “This is an added safety measure that not many employees take advantage of.”
Don’t let the fear of the unknown keep you from acting. Ask around. See how others have addressed this same situation.
“The point of surrounding yourself with experts is genius,” says William Tincup, President of RecruitingDaily in the Dallas/Fort Worth Area. “We’re not taught personal finance in school. That’s why most Americans make horrible financial decisions.”
Don’t be like most Americans. Don’t make horrible financial decisions.
Seize the opportunity.
Even if retirement is years away, changing jobs provides you the opening to take your first step towards controlling your future.