Orphaned 401(k)s: Are You Leaving Money on the Table?

Kevin Cimring wrote an article for Fox Business online on the four reasons why you should regain control over orphaned 401 (k)s now.

The average American holds more than seven jobs in a lifetime, and all too  often, workers neglect their 401(k)s as they move from job to job.

Fifty percent of American adults who’ve participated in a 401(k) or  equivalent retirement plan left their “orphaned” account at a previous employer,  according to an ING Direct USA survey.

Leaving 401(k) accounts when moving to a new employer means you are not  making the most of the savings you’ve worked so hard to accumulate and are  essentially leaving money on table. Yet, millions of Americans do this all the  time.

Here’s four reasons why you should regain control over orphaned 401(k)s  sooner rather than later:

No.1: Out of Sight Out of Mind

The ING survey also shows nearly a quarter of the 50% of workers who reported  orphaning a 401(k) left between $10,000 and $50,000 in these accounts. An  additional 11% claim to have no idea how much money was left in those accounts.

By not rebalancing and monitoring fund choices or shifting to a more  conservative mindset as you approach retirement, you are increasingly stuck with  investments that may not meet your current needs, age, risk tolerance and  overall circumstance.

No.2: More Accounts, More Complexity

The more retirement accounts you have, the tougher it is to effectively  manage them. To maximize retirement funds, it is important to ensure you have  the appropriate asset allocation across your entire retirement portfolio.

Managing your portfolio holistically allows you to be tax effective by  ensuring you hold the right types of assets in the right accounts. For example,  REITs (real estate investment trusts) – which generate income – are generally  preferably held in tax-advantaged accounts such as a 401(k) than taxable  accounts.

No.3: Limited Fund Choices

Many 401(k) plans offer only a limited number of investment choices, which  may have high fees or simply not offer appropriate funds for your financial  goals.  Rolling your money into an alternate account like an IRA may expose  you to a wider assortment of lower fee funds and a broader range of asset  classes better suited to your investment profile.

No.4: Other Alternatives

You essentially have four alternatives when deciding what to do with your  401(k) when you switch jobs: keep your money in your former employer’s 401(k)  plan, roll your money into your new employer’s 401k plan, roll your money into a  brokerage IRA, or make an early withdrawal.

The early withdrawal option should be avoided because you’ll pay a 10%  penalty if you’re under age 55 and get hit with a higher tax bill as you’ll need  to pay taxes on your withdrawal. Taking money out early also means missing out  on years of compounding growth.

Leaving your 401(k) with your previous employer may not always be a bad  choice if you are disciplined in managing the account and you have made a proper  evaluation of the plan versus your other options.

To determine the best decisions for you, you’ll want to weigh the pros and  cons of all three options based on specific criteria, such as: the array of  investment choices offered within your former and new employer’s respective  401(k) plans, the fees associated with those plans and the transaction costs  associated with making trades in a brokerage IRA. Discounted trades through  online brokers and the vast array of investment options have made the brokerage  IRA the favored choice of many.

Whatever your decision, making sure you continue to monitor your orphaned  401(k)s as part of your overall portfolio will help you lock in more for your  retirement.


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