The typical American will have worked at seven employers over the course of their careers, accruing all sorts of experience but often leaving behind something hard to replace: their retirement savings accounts.
It's a big problem: Whether it's inertia, neglect or simple forgetfulness, 15 million orphaned 401(k) accounts representing more than $1 trillion in investment dollars littered the financial landscape in 2010.
According to an ING Direct USA survey, 50 percent of American adults who’ve participated in a 401(k) or equivalent retirement plan left an account at a previous employer.
Nearly a quarter of those left between $10,000 and $50,000 in these accounts. Eleven percent of those surveyed said they didn’t know or couldn’t remember how much money was left in these old accounts.
It's not just a problem of leaving money behind. There's also the concern that the investment choices made in a 401(k) account opened in your 20s is out of whack with your age and attitude toward investing.
The Employee Benefit Research Institute found that workers with more than one kind of retirement investment generally keep a higher percentage of their funds in stocks than those who have one kind of account.
That suggests a lack of balance with more stable, interest-bearing assets, like bonds in stock-heavy IRAs that are often old 401(k)s rolled over for safekeeping as workers left a job and never updated.
So what should people be doing with these orphaned accounts?
The worst thing they can do is cash them out, said Robert Henderson, president of Lansdowne Wealth Management in Mystic, Conn.
The second-worst? Just leave them there untouched.
Clients will sometimes approach Henderson and tell him they have $5,000 in one account and $30,000 in another account.
“It may seem small at the time, especially if you’re young, but that’s a good start to a nest egg. If you just cash them out every time you leave your employer, even if it is not very big, you are not feeding that nest egg for the long-term,” he said.
Those who opt to cash their accounts out when they leave a job will, of course, face taxes on them. If they are younger than 55 at the time, they also will pay a 10 percent penalty on that money for early withdrawal.
Given all of that, advisors recommend people consolidate their past accounts into a self-directed IRA or move them into their latest employer’s 401(k) plan. That way the money isn’t out of sight or out of mind.
Of course, someone who enjoys managing their money might want to leave their accounts where they are, especially if they like the investment options available to them through an older plan. But, as any advisor will tell you, keep in mind that each plan charges a fee and when an employee has more than one account, she or he will be paying fees on every one of them.
Whatever course is taken, ignoring these accounts is one of the worst things an employee can do.
“If you let enough time go by, you give up gains or incur losses because you didn’t allocate your money properly,” Henderson said. “A lot of people use the default investment options, which is usually a money market fund, and they just never make changes to it. “
Henderson, for one, recommends consolidating those accounts because he believes people will look at their money more often if it is in one place.
But Neil Smith, executive vice president with Ascensus, said sometimes it does make sense to leave an old 401(k) alone.
“For instance, individuals might choose to leave their assets where they are if they like the investments available to them with their old employer plan, or if they enjoy the service model they’ve grown accustomed to with that employer plan,” Smith said. “If the new employer doesn’t offer a retirement plan, leaving the assets in the prior employer’s plan is also ideal if the person prefers having a fiduciary who—by law—is looking out for their interests.”
On the other hand, if the new employer has a great plan, it might be a good option to rollover those assets into the current employer’s plan. And if the plan doesn’t offer a lot of flexibility and control, an IRA might be the best option, he said.
“This allows the individual to manage their account on their own terms with access to a virtually unlimited number of investments and the choice of service provider for their account. However, the disadvantages could be a lack of knowledge or comfort searching thousands of investments on one’s own; and in many employer-sponsored plans, the available investments tend to be less expensive than the funds an individual would be able to get on their own,” Smith said.
Another thing to consider with orphaned accounts is whether a previous employer will be around forever. If you leave money at a former company and they get bought out or go bankrupt, it becomes a challenge to reclaim that money.
Each state has laws regarding what to do with abandoned financial accounts and property. They’re called escheatment laws. States handle these things differently, but in many, brokerage accounts and traditional IRAs that haven’t been touched in three years can be taken over by the state and that money incorporated into the general fund. Escheatment procedures also can begin after a person reaches the age when they are required to take a minimum distribution from their account. In the case of an IRA, that is age 70 ½.
For the most part, however, money held in 401(k) accounts is protected by the Employee Retirement Income Security Act and isn’t subject to escheatment laws. The one case in which these laws trump ERISA is when a plan sponsor wants to terminate its defined contribution plan. In that case, it might voluntarily decide to escheat the account balances of missing participants under a state’s unclaimed property statute to complete the plan termination process.
That’s why it is a good idea for workers to keep track of their previous retirement accounts. Keep each plan administrator apprised of your address, phone number and beneficiaries so that it's harder for someone to come in and declare your account abandoned.