The Price of Leaving 401(k) Money Behind
Many baby boomers have worked for at least six employers during their career. Leaving 401(k) funds dormant can be costly.
The average baby boomer has worked for six different employers over the course of their career, not counting jobs before age 24, according to the Bureau of Labor Statistics. That’s a lot of opportunities for retirement savings to be overlooked or lost. People tend to forget that they have old 401(k) plans from past jobs.
In retirement, a forgotten 401(k) account can cost you both time and money. You might not be able to access a 401(k) account from a company that has now gone out of business and have to search state abandoned property records in hopes of finding the missing funds.
Even if you’ve kept track of all your accounts, having too many of them complicates retirement planning unnecessarily. It means more companies to contact if you move or want to change beneficiaries, and more rules for you to follow — or risk hefty penalties for getting any of them wrong. This is particularly important once you turn 72 and must begin taking required minimum distributions. A missed RMD is hit with a 50% penalty on the amount that should have been withdrawn.
By consolidating accounts as retirement nears, you’ll also be able to organize and manage your investments better, with the likely potential to save on fees and taxes. Simplification is an advantage of consolidating retirement accounts with the benefit of saving management fees. Consolidating accounts will allow easier review to know how much you have and can help you manage your portfolio and more easily evaluate your individual holdings so they align with your current financial goals.
Leaving 401(k) savings with a former employer can also take a bigger bite out of your investment portfolio. Although a former employer must let you keep the money in the 401(k) if the balance exceeds $5,000, the company can force accounts under that limit into a rollover IRA invested so conservatively that annual fees can quickly erode the value. A Government Accountability Office study of forced-transfer IRAs found that annual fees combined with low investment returns could exhaust all the assets in an IRA worth $1,000 in just nine years.
Even an account balance greater than $5,000 has the potential to cost you more if you leave the money behind in a former employer’s plan. A 401(k) offers limited investment choices, whereas with an IRA, typically, you’re going to have more investment options. More often than not you’re going to have an opportunity to lower fees. That’s because a typical retirement savings plan from an employer layers additional management fees on top of those charged by mutual funds. It is estimates that a typical 401(k) plan charges expense ratios of 1% to 1.5% compared with mutual funds that often have fees of about 0.5%. And that’s assuming you understand the plan’s fees well enough to compare them because the costs aren’t always clear. A GAO report found that 45% of plan participants couldn’t determine the cost of their investment fee based on plan disclosures, and 41% incorrectly believed they didn’t pay fees.
Napoli Tax Services LLC is a CPA firm that can best provide you both Personal and Business Tax and related Financial planning services and advice and we are also open year-round to assist you.