Smart401k Blog

What to Do With 'Orphaned' 401(k)s

by User Not Found | Jan 29, 2016

Do you have custody of your nest egg? A 2013 survey by ING Direct USA showed that half of American adults who participated in an employer-sponsored retirement plan, such as a 401(k), have left an account at a previous employer. These “orphaned” retirement accounts represented more than $1 trillion in investment dollars in 2010. 

Leaving an employer is complicated enough, so managing a 401(k) account is likely the last thing on many people’s minds as they make an exit. Consider this: It’s common to move from one employer to the next every two or three years, particularly for people who are newer to the workforce. Someone in their mid-30s could have worked for four or five employers and left behind a 401(k) account each time they moved.

When you add it all up, the reality is there are a lot of orphaned retirement accounts that aren’t being reallocated or even monitored by anyone. And some are completely forgotten by owners now working for a new employer.

If your nest egg has, indeed, been lost in the shuffle, it’s time to take action and find your hard-earned funds. Even a small account balance can make a big difference down the line.

How do I locate orphaned retirement accounts? 

The quickest, easiest way to locate an orphaned account is to call the human resources department at your former employer. They should be able to help you or direct you to the plan provider.

For more difficult circumstances – for example, that the company you worked for no longer exists, or you left many years ago and human resources cannot tell you where your account is held – it could be difficult to track down your orphaned account. In that case, a government agency could help: the Pension Benefit Guaranty Corporation. This organization is designed to help find lost defined-benefit plans, commonly known as pensions, but it may be able to help find a 401(k) or similar defined-contribution plan. The National Registry of Unclaimed Retirement Benefits is another option to consider.

Finally, if all else fails, the financial advisor you’ve selected to receive your rollover may be able to help track down your money.

What should I do with orphaned accounts when I know where they are? 

Whatever you do, don’t cash out! That will likely lead to Internal Revenue Service penalties (if you’re under age 55) in addition to income taxes on the distributed amount. If your former employer’s plan will allow you to do so, you can leave your account there. But there are better options:

  • If your current employer will allow it, you can roll your orphaned account into your current 401(k). Consolidated accounts make maintenance far easier, and you’ll be better off with one cohesive investing strategy versus trying to align game plans among multiple accounts. Before you do this, make sure the new plan’s fund list meets your retirement savings needs. This may be a good choice if your orphaned account’s balance is $10,000 or below.
  • If you prefer a hands-on approach to investing and a wider range of investment options (and your account balance is more than $10,000), you might consider rolling your money into an individual retirement account. IRAs also give you easier access to withdraw your money in case of emergency than an employer-sponsored plan would. Avoid tax implications and possible withdrawal penalties by doing a direct rollover, in which funds are sent straight from the original account into an IRA without your touching them.

The best move for your orphaned retirement account or accounts depends on your personal situation, as well as your approach to investing. Some rollover options aren’t available in all situations, nor is a rollover always appropriate.

Regardless of where you choose to house the orphaned funds, once you have a handle on them, remember to apply your investing strategy. Diversify across the same asset classes, at the same percentages, as you’ve done with your other retirement investments. This will help ensure you and your funds are one big happy financial family.

This post is part of Smart401k CEO Scott Hollsopple’s contribution to the U.S. News & World Report Smarter Investor blog series. To view the original article, click here.

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