The Danger of Forgetting to Roll Over Old 401(k)s

One of the perks of employment is a 401(k). But what happens with the money you’ve accrued for retirement when you change jobs?

The money is still there. But leaving behind an old 401(k) may be a costly mistake.

Keep reading for the costly dangers of forgetting to roll over an old 401(k).

1. Why So Many Americans Are Forgetting to Roll Over Old 401(k)s

The job market is changing rapidly, which means people are switching jobs more than ever.

And this means, there are a lot of 401(k)s left behind with old employers.

According to recent data from Capitalize, “The number of forgotten 401(k)s increased by over 20% since May 2021 driven by a period of heightened job switching (“The Great Resignation”) with 3.8 million and 4.4 million accounts left behind in 2021 and 2022 respectively.”¹

Based on their findings, this equates to one in five investors leaving a 401(k) account behind when changing jobs.²

But it is unfair to say most of these people simply forget to roll over 401(k)s.

For many, it may seem easier just to leave their 401(k) account where it is rather than rolling it over.

This may be due, in part, to the assumption that previous 401(k)s will be taken care of by the past employer.

This is far from the truth.

It’s your money, which means it is up to you to manage your 401(k).

And, if you don’t continue to care for it, you could miss out on a significant amount of retirement savings.

2. The Average Balance of Forgotten 401(k)s

It’s important to note that many of these 401(k) accounts have a substantial amount of money in them.

Capitalize reports, “As of May 2023, we estimate that there are 29.2 million left-behind or forgotten 401(k) accounts holding approximately $1.65 trillion in assets, up from 24.3 million and $1.35 trillion in May 2021. This represents 25% of all 401(k) plan assets, up from 20% in May 2021.”³

For the individual, it adds up.

“The findings were striking: an estimated 24.3 million 401(k) accounts holding $1.35 trillion in assets had been left behind by job changers as of May 2021 with an average balance of $55,400 in each of these forgotten 401(k) accounts.”⁴

Now, keep in mind that if you have $55,400 in your previous 401(k), it is not being taken care of, meaning it may not grow as it should, and it may not be what you need when you reach retirement age.

Let us explain.

3. Fees Are Still Charged

What you may not realize is that, even though you’ve left your job and enrolled in a new employer’s 401(k) plan, you will continue to pay fees on the original 401(k) account.

And the fees aren’t always cheap.

Unfortunately, many employees don’t even know how much they are paying in fees.

According to Capitalize:

  • Two-thirds (71%) responded that they don’t know the amount they’re currently paying.
  • Nearly half estimate they’re paying less than 0.4% of total assets in 401(k) fees and costs — but in reality, only 10% of all plans charge less than 0.4%.⁵

Those who don’t roll over 401(k)s can even more easily lose track of how much they are paying in fees and the changing costs.

4. Difficult to Manage Different Accounts

For investors who jump from job to job they may have numerous 401(k)s left behind with former employers.

Given that the average American held 12 different jobs before retirement, that’s a long string of 401(k) accounts.⁶

Numerous left-behind 401(k)s may make it more difficult to manage your retirement savings.

5. Accounts Are Not Rebalanced as Needed

If you forget about an old 401(k), you aren’t actively monitoring it.

That means your investments may not be properly allocated or rebalanced according to your changing financial goals.

This can hamper the growth potential of your retirement savings.

You can make changes to a 401(k) you left behind, but you can no longer contribute to it.

If you want to make changes, you would have to be proactive and reach out to the investment custodian, and have them make the changes to the investments.

6. Miss Out on a Huge Chunk of Money for Retirement

The number one reason why you shouldn’t forget to roll over 401(k)s is because it can potentially mean significantly less money for retirement.

We’re talking hundreds of thousands of dollars less.

Capitalize estimates, “The potential opportunity costs of leaving behind money in a poorly allocated, high-fee forgotten 401(k) — up to $700,000 in retirement savings over 30 years to an individual, and $116 billion to retirement savers in aggregate.”⁷

7. 401(k) Plan Options When You Leave a Job

When you change jobs, you have options.

You don’t have to leave your 401(k) behind with your former employer’s plan, but you can. Just know you’ve been warned.

You can also roll over old 401(k) savings into an individual retirement account (IRA). This option has many advantages, including consolidating more than one 401(k) account into an IRA. This works well for those with a string of old 401(k) accounts.

One of the advantages of rolling over to an IRA is that most 401(k)’s have a limited investment menu whereas rolling to an IRA can open up the world of other investment options, as well as professional management.

In addition, you can roll over your old 401(k) into your new 401(k), if permitted by your new employer. If you have at least $5,000 saved in your old 401(k), most companies allow you to roll it over.

Lastly, you could cash it out. However, this is inadvisable – especially if you are age 59½ and under. Cashing out your old 401(k) before then means it will be considered a taxable distribution.

Not only will you have to pay taxes as ordinary income, but you’ll pay a 20% early withdrawal penalty.

Before you decide what to do with your old 401(k), it’s important to know the irreversible and costly 401(k) rollover mistakes.

Have questions about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.

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