While I was casually reviewing my email, I came across an old statement from a previous job. Surprise! A dormant 401(k) account remained untouched in my financial portfolio. If you’ve ever switched jobs, chances are you might have one too.
As of May 2023, there were around 29.2 million forgotten 401(k) accounts holding approximately $1.65 trillion in assets, Capitalize research shows. These orphan accounts can quietly grow—or just sit around underperforming.
I reached out to a financial planner, and here are the 18 steps they recommended to take next so that money doesn’t go to waste. Be sure to check out Slide 20 — it’s packed with key insights and takeaways you won’t want to miss.
Track Down the Account Details ASAP
First, determine where the account is located. Did Fidelity manage it? Vanguard? Empower? You can check old pay stubs, HR documents, or use the National Registry of Unclaimed Retirement Benefits.
When you pinpoint where your money is, you gain control over it immediately. Do not ignore this account simply because it remains hidden from view.
Check the Current Balance
Determine the account balance after locating it. The average balance in a forgotten 401(k) account is $56,616. Even a small sum of just a few thousand dollars can expand substantially through strategic management.
Many people are surprised to find more than they expected due to years of market growth. A forgotten fund you discover might actually be a small but valuable nest egg. Each dollar becomes important during retirement planning.
Look at the Investment Mix
Next, review how the money is invested. Does your investment remain in a default fund that has high fees and poor performance? A lopsided allocation could cost you.
A target-date fund may no longer serve your financial objectives. Your investments should continue to align with your risk tolerance and time horizon.
Assess the Fees
401(k) plans typically charge an average annual fee of 1%, but can vary between 0.5% and more than 3.5%, depending on the specific plan. Zippia reports that the typical per-person administrative fee amounts to $422.30. High fees erode your savings balance without any immediate signs.
Evaluate the expense ratios of your investment funds and review account maintenance fees and administration costs. An annual fee gap of only 1% can result in significant financial consequences over many years. You should consider transferring your funds if your previous plan comes with poor fee arrangements.
Decide Whether to Roll It Over
You face three options. Keep your money in its current status, move it into a new 401(k) account, or transfer it into an IRA. You can combine your retirement funds through a rollover while gaining access to a wider variety of investment choices.
IRAs provide enhanced flexibility options, but maintaining your existing 401(k) could be simpler if it achieves good performance results. Consult with your financial advisor to determine the best approach to achieve your financial objectives.
Avoid Triggering a Tax Bill
To avoid taxation when transferring funds, opt for a direct rollover. You can transfer your money directly to your new account without any taxes being taken out during the process.
The Motley Fool advises that withdrawing funds results in income tax payments as well as a 10% penalty for those under 59½ years old. One mistake in this process could rapidly diminish your account balance. Handle it carefully and professionally.
Check for Employer Stock
Some retirement plans include company stock, which can result in tax consequences. Make sure to get information about Net Unrealized Appreciation (NUA) rules when dealing with employer stock.
Some situations allow you to pay capital gains taxes, which are lower than regular income tax on gains. Due to its complexity, you should consult with a tax professional or financial planner before proceeding with any actions.
Review Your Beneficiaries
When you opened your account, you probably designated a beneficiary, which might have included an ex-partner. It’s time to check and update that info.
Your retirement paperwork needs to remain updated as your life circumstances evolve. No one wants to discover that their money was given away to an unintended recipient. Always ensure your information reflects your present intentions.
Check for Required Minimum Distributions (RMDs)
If you’re nearing age 73, that old 401(k) might soon be subject to RMDs. The onset of Required Minimum Distributions (RMDs) will start at age 73 in 2025. The IRS explains that you will incur a 25% penalty for not taking the required withdrawal amount, but you can reduce this penalty to 10% if you correct the mistake within two years.
You have to withdraw funds from your account even if you currently do not need them. Understanding the rules will ensure that you avoid unexpected situations later on.
Look for Roth Contributions
Some plans offer Roth 401(k) options. The Roth portion of your previous account may require you to comply with different withdrawal regulations. The growth of Roth funds occurs tax-free but requires separate tracking.
It’s important to distinguish which part of your investment is pre-tax and which part is after-tax. That info matters when you eventually withdraw.
Keep an Eye on Market Conditions Before Moving Funds
Rolling over during a market dip? That could mean locking in losses if you’re not careful.
A financial planner could advise delaying your move until market conditions stabilize or timing it to minimize the impact. Just don’t let fear paralyze you. Timing your financial move properly helps maintain the future value of your investments.
Watch for Dormant Account Fees
Providers of 401(k) plans often impose fees for accounts that remain inactive or have small balances. Your retirement account balance may decrease because of costs, even when market performance improves. The annual charges for these fees start at $10 and reach up to $50, but providers may charge more.
Rolling over helps you dodge the fees associated with inactive accounts. When you let the money sit idle for extended periods, it becomes a financial drain. It’s basically keeping your car running in the driveway until it burns through its fuel.
Review Your Overall Asset Allocation
When your old 401(k) becomes relevant again, reevaluate its place within your complete investment strategy. Does your investment portfolio contain an excessive concentration in a single sector or asset class?
Your investment strategy should ensure diversification across all accounts you own, rather than focusing solely on your primary account. You might need to perform rebalancing to reduce potential excess risk.
Check If the Plan Is Terminating
There is a limited time frame to take action when your employer terminates the plan. The money will need to be moved, and failure to act promptly can result in automatic cashing out or transfer to an unselected IRA.
Always read notices carefully and act quickly. Missing deadlines can result in tax penalties.
Consider Consolidating Other Retirement Accounts Too
Now is the perfect time to gather all your old 401(k)s if you have several scattered around. Combining multiple retirement accounts into a single IRA or 401(k) streamlines management and tracking while also optimizing performance.
Consolidation reduces the risk of neglecting additional accounts in the future. Less clutter, more clarity—that’s a win.
Review Vesting Schedules and Employer Contributions
Your entitlement to the full employer contributions may not be guaranteed if you depart your job before reaching full vesting status. Check your former employer’s vesting schedule to determine your ownership of the matched funds.
Understanding your actual ownership through this review establishes realistic expectations about your balance. If you did not reach full vesting status, the employer contributions you lost may not be recoverable. Understanding the assets you own helps simplify future financial planning.
Set a Reminder for Annual Reviews
Keep this account in your active financial planning since it has returned to your attention. Create a yearly recurring reminder to audit your account status.
Evaluate how your account performed and update your details while confirming it supports your retirement strategy. Treat it like any other active investment. Investing some attention in your finances today can lead to greater financial returns in the future.
Make a Plan for That Money
At any age between 35 and 65, you should actively manage your money instead of letting it remain unused. Include this account as part of your overall retirement strategy. Do you need to contribute more?
Change your risk profile? Use it to fund early retirement dreams? When you show more purpose in handling your old account, it becomes significantly more powerful.
KEY TAKEAWAYS
- Track it down and take charge. The old 401(k) account you left behind may contain thousands of dollars sitting idle. Use the National Registry of Unclaimed Retirement Benefits to locate your accounts.
- Don’t sleep on the fees. Your savings are vulnerable to hidden erosion from excessive costs. Over time, minor fee differences of 1% can accumulate to significant amounts. Analyzing and comparing expense ratios will help your money function more efficiently.
- Rollover wisely, and avoid tax landmines. Transferring funds through a direct rollover into an IRA or new 401(k) protects you from unnecessary taxes. Be careful to sidestep errors that might lead to financial penalties or excessive taxes.
- Review how it fits into your big picture. Don’t let your old 401(k) sit disconnected. Integrate your existing retirement plan into your overall asset allocation strategy to maintain a balanced portfolio.
- Don’t let market timing catch you off guard. Get advice before taking action if you plan to move funds during a market downturn. Utilize strategic timing to avoid premature recognition of financial losses.
- Update your beneficiaries. Ensure your beneficiary list accurately reflects your current contacts and excludes outdated relationships. This simple step avoids future headaches.
- Set it and don’t forget it—again. Schedule an annual check-in for the account. Conducting a yearly review enables you to achieve higher investment returns while minimizing fees and developing a deliberate retirement strategy.
Disclaimer – The Finance Key does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. Including links to third-party content is not an endorsement by The Finance Key of such content or services. Please do your due diligence and use your discretion.
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