Leaving Your 401(k) Behind: Risks and Next Steps

 

Navigating Your Old 401(k) - A Decision That's Anything But Routine

These days, job-hopping is more the norm than the exception. And every time you switch careers, you've got a big financial question staring you straight in the face: what are you going to do with that old 401(k) plan? Far too many people just kinda... leave it there, without really thinking it through. Part of the reason is probably just plain old inertia - they don't know what to do, so they do nothing. But it's not just that - a lot of people just don't really understand the implications of leaving their old 401(k) sitting around with their old employer. And the truth is, understanding these implications - especially when you're dealing with things like inflation and wild swings in the markets - is pretty much crucial if you want to make sure your retirement is taken care of.

The Default Route: Just Leaving Your 401(k) Be

So what happens when you leave a job? Your 401(k) doesn't just disappear, obviously. It sticks around, just sitting there, growing (or - let's be real - not growing) based on whatever investments you'd chosen before you left the company. Some people find this 'do nothing' approach kinda comforting - maybe the plan had good options and wasn't too pricey, so it's easy to just let it be. And sure, you don't have to do anything right now, and the tax benefits are still intact. But the thing is, this laid-back approach can come with some not-so-obvious downsides - and a significant lack of say in what happens to your nest egg.

The Not-So-Good Parts of Standing Pat

• Higher Fees Than You Think: One of the worst things about just leaving your 401(k) with your old employer? The fact that you might be getting nickled and dimed with higher fees. When you're working for the company, they often pick up some of the administrative costs, but as a former employee, you're on your own - and those costs can really add up over time. Plus, your old employer's plan might have investment options with higher expense ratios, which can be a real drag on your returns in the long run. And those tiny little fees? They can really eat into your savings over the years.
• Limited Choice in Investments: Now, the 401(k) plans your old employer sets up for you are, by definition, a pre-curated selection of investment options. They might be okay when you're working there, but when market conditions start to shift, you might find that your options just aren't what you need to meet your goals. The flexibility to choose from a wider range of investments - like individual stocks, or a broader range of mutual funds - becomes a really big deal as markets get choppier and choppier.
• No Oversight - And a Right Old Logistical Nightmare: Managing multiple 401(k) accounts from past gigs can get to be an absolute pain. Keeping track of all the different logins, statements and performance reports can be a real challenge. And when you've got all these separate pots of money scattered around, it's really tough to get a clear picture of your overall retirement situation - which is kind of a big deal if you want to keep your finances on track.
• Outdated Beneficiaries Anyone? Another thing that's really easy to forget to update: your old 401(k)'s beneficiary designations. Life happens - you get married, get divorced, have kids - and if you don't update those beneficiary designations, you might find that your assets end up being distributed according to some plan that just doesn't align with your wishes. 
• Required Minimum Distributions (RMDs): As you get closer to retirement age, dealing with Required Minimum Distributions (RMDs) on multiple accounts all over the place can be a real pain - but it's one of those things that can also get you into a whole heap of trouble if you mess up. Putting all your retirement money into one place, like an IRA, can make RMD calculations and management a whole lot simpler and reduce the risk of getting hit with a costly penalty for missing a distribution. If you want to know more about 401(k) rollovers and how they work with taxes, there's loads of information available on the IRS website.

Getting Your Head Around Your Options: Planning Ahead for Retirement

Rather than just letting your old 401(k) just sit there gathering dust, you might want to think about trying some proactive strategies:

• Rollover to Your New Employer's 401(k): If your new job has a 401(k) plan that looks pretty good - decent investment options, reasonable fees and all the rest - just rolling over your old 401(k) into the new one is probably going to be the simplest way to get everything consolidated into one place. This way you keep the funds in an employer-sponsored plan so you get the creditor protection that comes with it.
• Rollover to an Individual Retirement Account (IRA): This is probably the most popular option and for good reason - you get a great deal of control over your investments and you can tailor your portfolio to your individual needs and goals. You can pick from a massive range of investment options, probably get lower fees and simplify the whole management side of things. An IRA rollover is especially useful in today's market where some investments are doing far better than others. For some good advice on how to manage your investments and plan for your retirement, you can do a lot worse than reading some of the financial news websites out there.
• Cash Out: Don't even think about cashing out your 401(k) unless you absolutely have to - it's just a recipe for disaster. If you take money out before you're 59 1/2, you're going to get hit with a 10% penalty on top of paying tax on the withdrawal as ordinary income. This will just deplete your retirement savings and all the hard work you've put in will be undone.

Why it's so important to keep on reviewing your progress

With inflation eating away at your purchasing power and interest rates playing havoc with your investments, managing your retirement savings is more important than ever. If you just leave your old 401(k) to rot you might be missing out on opportunities to optimize your portfolio, cut down on fees and make sure your assets are working as hard as they possibly can be to give you the future you want. You should do a regular review of your old plan's performance compared to current market offerings and use that to inform your retirement planning. A financial advisor will be able to give you some real insight and help you navigate the complexities of 401(k) rollovers and asset consolidation so you can work out what's best for your own situation.