Risks of Leaving Your 401k Behind

401(k) plans are one of the most popular ways to save for retirement. This is partially because modern employers typically offer a 401k to their employees instead of a traditional pension plan. While this availability makes owning and contributing to a 401k easy, it also makes forgetting about your account just as easy. In fact, leaving a 401(k) is a common problem people face.

Understanding how 401(k) plans get abandoned and the potential risks involved can help you learn how and why to keep this problem from happening to you.

What is an abandoned 401k?

Abandoned 401(k) accounts are accounts left behind whenever you move on. Most typically, this happens when you change employers. This is understandable since changing jobs can often be a chaotic time in one’s life.

It’s also possible that your company has gone out of business and your retirement accounts got lost in the shuffle. The U.S. Department of Labor estimates that each year, workers leave behind $155 billion in 401k funds.

How to find abandoned accounts

It’s important to know that, just because you might have accidentally left your 401k behind, doesn’t mean it’s gone. Your account still exists and the money within it still belongs to you. However, your previous employer can still choose to terminate the account. If this occurs, you should receive the funds as a distribution.

401k plan termination is an official process. It requires filing a form 5500 and other documents. Thanks to this documentation, The National Registry of Unclaimed Retirement Benefits can help you discover if this has happened to any of your accounts. If it has, they can help you claim the funds owed to you.

You can also perform an unclaimed property search using some of your basic contact information.

How do I avoid abandoning my 401k?

The first step to keeping your 401k account under your control is understanding how abandoned accounts happen. As we’ve discussed, most abandoned 401k accounts occur during moments of transition. If you’re changing jobs or your company is going out of business, it’s helpful to keep your retirement plans in mind.

Consider asking your employer how to request a 401k rollover. In some instances, you may need to contact your plan administrator. Most often, this is a third party in charge of managing the company’s retirement plans.

Performing a 401k rollover

There are two ways to perform a rollover. In the first way, your previous plan administrator can send a check for your entire 401k account balance to your new administrator. They can then put your money into your new account.

In the second method, your previous administrator sends you the check for your full balance. When this happens, you have 60 days to deposit the money into your new 401k account. If you fail to roll over within 60 days, the funds are considered income. Because your contributions are tax-deferred, you’ll have to pay income taxes on the full amount.

What are the risks of an abandoned 401k?

Leaving your 401k behind comes with a number of risks. It’s important to remember that your 401k is meant to provide for your living expenses during your retirement. It’s your money; it should be available to you when you need it.

With that in mind, when you leave behind your 401k, you risk:

1. Loss of control

When you no longer work for the employer who controls your 401k, you no longer have a say in what happens to your account. You can’t decide how your money gets invested. If your relationship to risk changes over the years, you can’t change your account to reflect that. If you get new investment advice about a mutual fund, you won’t have the opportunity to act on that advice.

It’s your retirement that’s at stake—the ability to control your money is very important to ensure that you retire when you want, the way you want.

2. Eroded balances

If your account has more than $5,000, your previous employer must keep your money within your account. However, if your 401k has less than $5,000, they can make more damaging decisions. For instance, they can roll your funds over into a new account with limited capacity for growth. If this happens, your account could actually grow so slowly that its value drops precipitously over the years.

3. Opportunity costs

As an investment, 401k accounts are intended to grow more valuable over time. One of the best ways to maximize that growth is through regular contributions to your account. The more you contribute—and the closer to the contribution limit you get—the faster your account can grow.

However, once your account gets left behind, you’re no longer able to contribute. Your account can only grow as fast as your investments. Over the years, this opportunity cost can add up to large losses that can impact your retirement.

4. Improper planning

In order to plan for your dream retirement, it’s helpful to know how much money you have and where to find it. With abandoned accounts, it’s possible to forget what funds you have available to you. An inability to track your retirement accounts can make planning for retirement more difficult.

In addition, the lack of control you have over abandoned accounts can have an impact on your retirement plans. For instance, if your retirement plans change over the years, you won’t be able to change your investments to reflect those new plans.