According to new federal projections, the typical American will make five to seven career changes before retirement. With each transition period, things like 401(k)s fall by the wayside and are often forgotten.
If you are one of the many Americans with an orphaned 401(k), you have a few options at your disposal. And if you’re unsure if you have one, a protocol exists for that as well.
If you are unsure as to whether you have orphaned a 401(k), we first suggest using the Pension Benefit Guaranty Corporation site. Though designed to help locate pensions, they are also a resource for locating 401(k)s. If that fails, we next go to the National Registry of Unclaimed Benefits, which aims to connect the employers holding the forgotten retirement accounts to its former employees. Forgotten accounts that have been terminated or are in the process of being terminated can also be found through the United States Department of Labor’s Abandoned Plan Search site. If all else fails, a financial advisor can help you track down your accounts.
On the other hand, if you are aware that you have orphaned 401(k) plans from previous employment you have three options:
Doing this makes sense if you prefer your new plan’s features, costs, and investment options. Beyond just high fee funds, a 401(k) through your former employer may now be subject to administration fees that your old company no longer negotiates on your behalf. Most importantly, however, is that you are likely not paying attention to the investment mix, and investments may be underperforming or, most likely, your allocation – and therefore your risk – have shifted. Contact your current 401(k) plan administrator for rollover instructions. If you do decide to conduct a rollover, it’s highly advised to perform a direct rollover where funds are sent straight from your original account to an IRA without touching it, as to avoid tax implications and withdrawal penalties.
Those seeking an individualized hands-on approach may choose a Traditional IRA or a Roth IRA, to have greater autonomy over the investments, as IRAs are more like normal brokerage accounts. Again, contact your current 401(k) plan administrator for rollover instructions.
This is an attractive feature if your original 401(k) plan has a better selection of funds or the fees are less than your current 401 (k) plan. However, if you elect to keep the original 401(k) as is, you cannot make any further contributions to this, and you must watch it vigilantly in the event the company closes or liquidates. Also, as mentioned above, make sure you are logging into the account to re-balance at least annually so that your investment allocation stays true to your intentions.
It is not suggested to withdraw distributions from your orphaned 401(k), or any retirement account, before you are 59 ½, as you will have to pay the IRS a 10% penalty on top of the income tax that is paid under any early withdrawal.
To learn about the difference between IRAs and 401(k)s and figuring out which is the best fit for you check out Which Retirement Account is Right for You?