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


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.

Kevin Cimring is CEO of Jemstep, an online investment advisor that helps people lock in more money for retirement. Using patented technology and proven portfolio management methodologies, Jemstep tells users exactly what to buy and sell to maximize their returns without undue risk, avoid high fees, and reduce taxes. Jemstep’s easy-to-use website takes the complexity, difficulty, and anxiety out of investing. A Registered Investment Advisor with the SEC, Jemstep is led by a team of experts with over 100 years’ combined experience in financial management and technology innovation and development. Learn more at Jemstep.com.