The average employee older than 25 only stays at the same job for around five years, according to the Bureau of Labor Statistics, so there is a good chance most workers will participate in more than one 401(k) plan through different employers. Fintech company, Capitalize, estimates that American workers have nearly $1.35 trillion in previous employers’ plans. With the average forgotten 401(k) balance around $55,400, that could make a meaningful impact on one’s retirement plans. As more employers automatically enroll workers into 401(k) plans, the chances are that a larger share of workers will forget about their accounts and leave them behind.
Anyone with assets in a company-sponsored plan must be treated as a participant in that plan, regardless of whether they still work for the company. Tracking former employees can be an administrative burden for a company’s human resources department, as they are required to distribute annual Department of Labor disclosures. Furthermore, if the company’s 401(k) plan changes vendors, former employees’ assets could default to another investment option during a change.
Generally, companywide emails or enrollment meetings communicate any changes to plan participants for the current workforce; however, human resources departments must make a reasonable attempt to contact former employees if they choose to leave their assets in the plan. It is the responsibility of the former employees to keep their contact information current.
We highly recommend that employees roll their 401(k) to their new employer’s plan. Almost every 401(k) allows for a rollover of pre-tax funds. Roth 401(k) assets may be rolled over as well if the new employer’s plan offers a Roth 401(k) that allows transfers. While the investment options are limited within company-sponsored retirement plans, the fees can be reasonable, and the assets will have broad protection against creditors. Other benefits to consolidating 401(k) accounts are that it reduces an investor’s oversight obligations and builds a barrier against sabotaging one’s retirement savings. A study conducted by Northern Trust found that workers with balances less than $1,000 cashed out between 60% and 84% of the time, while those with a $10,000 balance remain in their 401(k) plan 97% of the time.
If, for any reason, a rollover to a new plan is not an option, workers can roll an old 401(k) to an IRA through a trustee-to-trustee rollover, or direct rollover, so that no taxes are withheld from the transfer amount. The transfer remains a non-taxable event. Unfortunately, investments are liquidated, and investors are responsible for researching and selecting the investments to use and determining asset allocation.
Above all, workers should never opt to cash out a 401(k), as ordinary income taxes are due on the withdrawal and an additional 10% early withdrawal penalty if the investor is younger than 59½. This is important to note because plan administrators can close the account and mail a check to a former employee if the 401(k) balance is less than $1,000. For balances between $1,000 and $5,000, the plan administrator can roll assets into an IRA administered by a third-party custodian.
If you have questions on consolidating 401(k) accounts, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the September 10, 2022 “Henssler Money Talks” episode.