I Feel Like I’m Forgetting Something…

By The Lerner Group on June 22, 2020

You know that feeling when you leave your house and you think, “What am I forgetting?” You quickly scan your pockets mentally checking off a list for your phone, keys, wallet, etc. Considering we tend to do this daily, it has become second nature. Let’s face it, our lives are hectic, and now more than ever, we may be experiencing changes.

In today’s environment of the COVID-19 disruptions, many have lost or changed jobs for one reason or another. The process of changing jobs brings with it a multitude of emotions and stressors. Noting this is something many of us don’t do on a “regular” basis, our subconscious, habitual checklist, as noted above, is often much more difficult to remember.

One key item that comes to mind when changing jobs is your employer sponsored retirement plans or 401(k). Who is guilty of switching jobs but leaving behind a 401(k) with a former employer? On the surface, this does not seem like a big deal. However, let’s take into consideration that we as millennials tend to switch employers more often than generations prior¹. That means you are potentially keeping track of multiple different employer plans with multiple different platforms to login to. Aside from this drastic example, there are many other reasons to keep track of your old retirement accounts.

Your Plan Sponsor Changes

Companies change providers for their plans over time and that means your plan will move along with them and you may receive an email or letter notifying you of the change. However, how many of us really dig into each of those correspondence? This could cause you to lose track of your account and have to search for it down the road through your former employer.

Update Allocations

Our risk tolerance and financial goals tend to change over time with important life events including marriage, babies and as your time horizon shortens. For example, let’s say you have a 401(k) with your former employer from early on in your career. If you don’t adjust your investments over time, your account may be riskier than it should be based on your current needs.

It Gets Lost… Yes, I Mean Literally

Believe it or not, you actually can lose your 401(k). Many people would argue that this is not possible, but I am here to tell you that this is in fact possible and presents many issues. These are what we call “orphaned retirement accounts” and they are accounts that have been abandoned by one of the following:

• You
• Plan Sponsor (former employer)
• Plan Administrator (company managing the investments)
• A combination of all three

I myself, had to assist a client with locating her old 401(k) from over 25 years ago and it was a combination between all the above. She had completely forgotten about this account all together and was only notified of its existence from Social Security. When an account is orphaned you have to locate it with the help of the U.S. Department of Labor offers resources  and it can be a lengthy process.

After reviewing these risks above, my hope is that it triggers that subconscious checklist for your next career move. Now that we have covered the potential issues with leaving your account behind, what are your options and what makes most sense for you?

1. Roll it into your new Employers 401(k)

Pros:

• Easy to keep track of, your 401(k) will be consolidated in one place
• Your employer may allow you to borrow funds from the plan

Cons:

• Plan administrator costs can be high
• 401(k)s tend to have limited investment options

2. Roll into an IRA

Pros:

• Tend to have lower costs than 401(k)s
• Typically have more investment options to choose from
• You can have an investment advisor work with you

Cons:

• May limit your ability to use backdoor Roth IRA conversion strategy

In the end there is no “right” answer, you should do whatever makes most sense for your situation. Your advisor can assist you with laying out which option may be best for you.

Warning: Keep in mind whenever rolling your 401(k) to either a new employer plan or into an IRA, you have a 60-day window to complete the rollover or the transaction may become a taxable event to you. 

1 https://www.gallup.com/workplace/231587/millennials-job-hopping-generation.aspx

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