Tens of millions of Americans are out of work
as a result of the COVID-19 pandemic and associated shutdowns. Once the economy
restarts in earnest, chances are many of them will return to different jobs,
even different careers.
That kind of monumental shift in the economy
will be an acceleration of an already common experience for many of us — job
mobility. The average American holds between 10 and 15 jobs over a lifetime.
Many of us spend less than five years at any one employer.
Yet five years is long enough to get started
in a 401(k) retirement plan and even build up a pretty good balance — money often left behind when we leave a job.
Over a recent 10-year period as many as 25 million people in workplace plans
changed jobs and left behind a 401(k) plan. Millions more have left behind more
than one, according to a GAO study.
ING Direct estimates that half of workers who
change jobs leave money behind in a previous employer’s plan, even those with
large balances. A quarter of “lost” accounts fall in the $10,000 to $50,000
range, notes ING.
The average 401(k) balance is currently around
$91,400. Sound like enough money to worry about? You bet. As of 2013 there was
$1 trillion sitting in orphaned retirement accounts, reports the National
Association of Plan Advisors (NAPA).
That’s money at a real risk of evaporating
completely, warns NAPA, due to state escheatment laws — regulations that pour
abandoned accounts into a state fund to await an eventual claimant.
According to the U.S. Securities and Exchange
Commission, these state laws treat your retirement savings as state-controlled funds.
Once claimed, states typically return to owners the balance at the time of
escheatment. You get no market gains and none of the dividends.
Most 401(k) plans are terminated when companies go out of business. While the company cannot keep your money, you lose unvested contributions and matching contributions are worth nothing if paid in the stock of a failed company. If your company is bought or merged your plan balance could be in an entirely different plan which you will now have to track down.
Even if you know where your money is held, the
fees in 401(k)s can be ludicrous. Over 10 years, owners of stranded 401(k)
plans paid nearly $44 billion in administrative fees on an estimated 38 million
left-behind plans nationwide, according to Boston Research Group.
Worse still, abandoned 401(k) balances
typically are placed in the most conservative investments possible. As a
result, they can languish as plan fees eat them alive.
The fact is, unless you’re in the government’s
massive Thrift Savings Plan or one of a handful of very large corporate plans, you likely pay a lot for your 401(k) investments.
Savers in small company plans, which is most people, pay as much as 2.46% in
total plan costs.
Fees aside, you might think that your old
401(k) is just fine on autopilot. It almost certainly is not. Investments that
made sense in your 20s or early 30s are not necessarily a good fit in your 40s
and older. Your old plan might be too heavily invested in stocks for your
goals, or not enough.
Moreover, a shocking number of people believe
that having money scattered among previous employer plans is the same thing as
diversification. It’s not. You can be in several different mutual funds and
still own a small number of the same, currently popular stocks, concentrating
your risk despite having “eggs in different baskets.”
True diversification is owning hundreds or thousands of different stocks in low-cost index funds. Low-cost funds are vital to reducing the overall cost of investing. The funds I prefer charge a tiny fraction of the typical stock mutual fund fee and provide instant, real diversification.
The risks of staying in an old 401(k) plan are
reason enough to take action, but consider the positive reasons to roll money
out and into an IRA. For one, there’s control. You wouldn’t be happy leaving
cash behind in your old bank after moving to a new town. Like an abandoned bank
account, a 401(k) at a previous employer is truly out of sight, out of mind.
The first step out of this mess is to open an
IRA, if you don’t already have one. You can do that with a phone call to any
one of several national brokerages or even your
local bank. Once the IRA is created, contact your past employers and ask about
a rollover.
A rollover means the money remains in a
tax-advantaged retirement plan, so there is no tax cost to selling your old
investments in order to buy new ones.
Make sure you request a rollover, not a
distribution. If you take money out of your 401(k) plan you will be liable for
taxes and, possibly, penalties for early withdrawal. Once the money is
transferred you can begin to choose new investments in your IRA that better fit
your current age, risk tolerance and retirement goals.
As the saying goes, it’s not about what you
make, it’s about what you keep. Investments left in old 401(k) plans are at
high risk of being unmanaged and often cost far too much. The solution is to
consolidate your old 401(k) balances by opening an IRA and rolling over those
accounts, then reinvesting in low-cost index funds.
A prudent portfolio of diversified index funds
can provide a powerful long-term return at a low cost.
Plus you’ll get the peace of mind that comes from seeing all of your
investments in one easy-to-manage spot.