Is Your 401(K) Getting the Attention it Deserves?...Probably Not
OK, quick show of hands…how many of you have ever reached for your wallet while at the checkout stand, only to discover that it’s not there. You immediately feel your heart drop to the pit of your stomach and your mind begins to race, retracing where in the world you could have left it. It’s then you realize that the to-go box was not the only thing you forgot at the restaurant earlier that evening. Now imagine that wallet is actually your 401(k), and the place you left it behind was with your former employer; orphaned, helpless and neglected.
Don’t feel bad, it’s common to move on to the excitement and challenge of a new job, and forget all about the retirement investment that you have so diligently contributed to. Then consider that the average American will work for seven different employers during their career, and you could find yourself with multiple 401(k)’s trailing behind you. In fact, there are an estimated 15 million orphaned 401(k)’s representing more than $1 trillion among US workers. Here are several problems with leaving behind orphaned 401(k) plans.
First, all 401(k) plans have limited investment options that may not represent the best alternatives for your particular investment objectives. Furthermore, the investment allocation is likely not appropriate for your current age and target retirement date.
Next, in spite of the Department of Labor’s initiative to reduce and limit the fees associated with retirement plans, many are laden with higher than necessary fees between the fund managers, plan advisor, and third party administrator. Higher fees means less of your investment is working for you, thus limiting your compounding growth potential.
Finally, most people find value in consolidating their retirement accounts for several reasons including:
So if you are one of the 50% of Americans who has left a 401(k) or equivalent plan at a former employer, what should you do? First, here’s what NOT to do. The worst thing you can do with an orphaned 401(k) is cash-out. In addition to taking valuable assets out of your retirement nest egg, the IRS taxes early withdrawals as ordinary income, as well as assess a 10% penalty if taken before the age of 59 ½. This should really be a last resort.
Therefore, the most prudent action is to roll the account over to either your current employer’s 401(k) plan or an IRA and continue to incorporate the investment into your retirement future. Unfortunately, as mentioned earlier, 401(k)’s have limited investment options and tend to be heavy on fees, so rolling over to your current employers plan is not ideal, but it’s certainly better than cashing out or leaving the plan orphaned altogether.
The best alternative is to rollover your 401(k) into an IRA (individual retirement account), which can be managed a variety of ways. If you’re the type who is confident and comfortable with managing your own retirement funds, you can roll the funds over to a self-directed IRA. However, if you’re like most investors, you may not have the time, resources, energy, or know-how to self-direct your retirement portfolio, and working with an investment advisor gives you much more assurance of developing and implementing the right plan for your future.
Don’t feel bad, it’s common to move on to the excitement and challenge of a new job, and forget all about the retirement investment that you have so diligently contributed to. Then consider that the average American will work for seven different employers during their career, and you could find yourself with multiple 401(k)’s trailing behind you. In fact, there are an estimated 15 million orphaned 401(k)’s representing more than $1 trillion among US workers. Here are several problems with leaving behind orphaned 401(k) plans.
First, all 401(k) plans have limited investment options that may not represent the best alternatives for your particular investment objectives. Furthermore, the investment allocation is likely not appropriate for your current age and target retirement date.
Next, in spite of the Department of Labor’s initiative to reduce and limit the fees associated with retirement plans, many are laden with higher than necessary fees between the fund managers, plan advisor, and third party administrator. Higher fees means less of your investment is working for you, thus limiting your compounding growth potential.
Finally, most people find value in consolidating their retirement accounts for several reasons including:
- Ease of account access and the ability to track investment growth
- Assurance of knowing that all of your retirement assets are invested properly and working toward the same retirement goal
- If something were to happen to you, your beneficiaries would have an easier time in transitioning and appropriately managing your assets
So if you are one of the 50% of Americans who has left a 401(k) or equivalent plan at a former employer, what should you do? First, here’s what NOT to do. The worst thing you can do with an orphaned 401(k) is cash-out. In addition to taking valuable assets out of your retirement nest egg, the IRS taxes early withdrawals as ordinary income, as well as assess a 10% penalty if taken before the age of 59 ½. This should really be a last resort.
Therefore, the most prudent action is to roll the account over to either your current employer’s 401(k) plan or an IRA and continue to incorporate the investment into your retirement future. Unfortunately, as mentioned earlier, 401(k)’s have limited investment options and tend to be heavy on fees, so rolling over to your current employers plan is not ideal, but it’s certainly better than cashing out or leaving the plan orphaned altogether.
The best alternative is to rollover your 401(k) into an IRA (individual retirement account), which can be managed a variety of ways. If you’re the type who is confident and comfortable with managing your own retirement funds, you can roll the funds over to a self-directed IRA. However, if you’re like most investors, you may not have the time, resources, energy, or know-how to self-direct your retirement portfolio, and working with an investment advisor gives you much more assurance of developing and implementing the right plan for your future.
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