According to the United States Government Accountability Office, millions of employees who leave their employers to retire or seek employment elsewhere leave without transferring their 401(k) account monies from their previous employer’s retirement plan. Over the 10-year period from 2004-2014, they estimated that 25 million former employees had left behind money in their 401(k) accounts after leaving their jobs. Many had left two or more accounts with multiple employers. That means that an astonishing number, representing 37%, of the 68 million employees participating in 401(k) accounts did not take action to take their accounts with them when they left their old employer.
There are several factors that contribute to the high number of accounts that have been left behind. One is the relatively high frequency of job changes. The Department of Labor estimates that today’s employees stay an average of just 5 years working for an employer before leaving for another job. Since many employers have automatic enrollment for employees in their 401(k) plan without employee awareness, many employees forget that they have ownership of an account that has been accumulating value over time. Unfortunately, many past employees never learn that they have monies left behind, because they fail to notify the employer of changes in their contact information including new residence and email addresses.
The average employee usually accumulates several tax-sheltered retirement accounts with multiple employers over their working years before retiring. As a result of this, there are several very good reasons why it makes sense for most everyone to combine one’s accounts in a rollover IRA.
The Most Important Reasons:
Combining multiple 401(k) and /or IRA accounts will make it much easier to efficiently and accurately accomplish the periodic portfolio rebalancing that is recommended to maintain the desired exposure to specific asset classes, such as stock, bond, real estate, cash, or other alternative investments.
Calculating mandatory Required Minimum Distribution withdrawals also will be much simpler and reduce the chances of a mistake that could be very costly due to the required 50% tax-penalty on any amount not meeting the minimum distribution requirements.
Merging retirement accounts also helps to reduce investor oversight work, making it easier to understand and manage one’s retirement funds. Having fewer accounts also will mean having fewer choices to deal with, which makes it easier to concentrate on the important task of evaluating the too often overlooked investment position choices.
Combining accounts also creates larger balances that may enable the account owner to meet investment minimums to qualify for investment options that have a lower cost for their investment holdings.
IRA accounts usually have many more investment options available that enables an advisor to provide professional investment advisory services. This will enable the chosen investment professional to create a portfolio that is specifically structured to meet desired risk and return objectives that are best suited for the account holder’s personal circumstances.
Rollovers of 401(k) accounts are accomplished by having the account holder contact the previous employer. Upon request, the employer will provide a form to complete that asks for the name and address of the IRA account that will be receiving the 401(k) funds. Since the funds will be transferred directly to your IRA, there will be no income tax consequences and all monies will retain the same sheltered tax-benefits that are provided to retirement accounts.
Greg Tinaglia
Last Updated: 01/09/2020