I love romcoms. Give me a movie that has a meet-cute and wedding, and I’m in. So, when “The Ghosts of Girlfriends Past” recently aired, I said alright, alright, alright to spending two hours with Matthew McConaughey on a Saturday night (sorry, husband). If you haven’t seen this classic (shame!), McConaughey plays, according to IMDb, “a serial womanizer” who is haunted by the ghosts of his past girlfriends while attending his brother’s wedding. While Matthew was dragged down memory lane, I started thinking about old 401ks.
Old 401ks are the ghosts of boyfriends (or girlfriends) past. Employees today no longer work for one single company from cradle to grave; the norm now is to change jobs every two to three years. If you’ve worked for 10 years, it’s conceivable that you’ve had 4 to 5 jobs, which means you may have 4 to 5 old 401ks just hanging out there…in the void. And you don’t think about them, because you’ve moved on, you’re in a new relationship and only looking forward. And yet, a certain song or smell occasionally triggers a memory of those former employers… and those old 401ks. You know you should do something about them - it is your money - but why dreg up the past? Well, if Matthew McConaughey’s antics taught me anything, it’s that you want to confront the loose ends from the past before they start haunting you.
Fortunately, you have a few options for dealing with your 401ks of employers past:
- Leave it in your old employer’s 401k plan
- Roll it into a current employer’s 401k plan
- Roll it over into a traditional IRA
- Distribute the funds to yourself (if you do this, you will face tax consequences – your funds will be subject to an automatic 20% federal withholding and potentially an additional 10% penalty, so don’t do this.)
If you’re the type to stay friends with your ex, leaving your old 401k in your former employer’s plan may make sense for you. It will be your responsibility to keep in contact with that employer so you can access your account. You will be subject to the plan’s rules regarding investment choices, distribution options, loan availability, and any applicable fees and expenses. You will not be able to make contributions to the account. Make a point to review your account periodically (e.g., quarterly) so you know the status of the account and how it’s invested. Your money could be invested in funds that do not align with your current goals or sitting in cash.
I recently read an article that relayed how an engineer in his mid-50s forgot about some old 401ks. One of these 401k accounts had a balance of $100k. He decided it was time to deal with these old accounts, and that’s when he learned that a company where he worked over 10 years ago had gone under and all their assets were frozen, including his old 401k. If his frozen 401k account was held in cash instead of invested, he lost out on doubling his money. Using the Rule of 72, his account value could have double had it been invested in a fund or funds with an annualized return of 7.2% over 10 years. That’s an additional $100k that he left sitting on the table.
The moral of that story is to check in with your ex-employer account. Wouldn’t you rather have a heads up about your ex’s recent engagement rather than bump into that ex and his new spouse a year down the road? Make a standing date to review your 401k account; keep the contact information for the plan’s administrator handy; and review the available investment options regularly to ensure that your investments align with your current goals.
For some people, like a closet full of past relationship mementos, it can be overwhelming to have to keep up with the different accounts at various financial institutions. Disorganization is a top money stressor. Another option to save yourself some gray hairs is to get your financial house in order by requesting a direct rollover into your current employer’s 401k plan or a traditional IRA. Some 401k plans make it easy by allowing direct rollover requests online.
If you’re fully committed to your new employer relationship and want to keep all your retirement accounts in once place, it may make sense for you to roll over your old 401k into your new one. Before you take the plunge, confirm that your employer’s plan allows transfers of old 401k assets. If you’re new to the company, you may have a waiting period after your start date before you can enroll in your new employer’s plan. Be aware that the rolled-over funds will be subject to the new plan’s rules regarding investment choices, distribution options, loan availability, and any applicable fees and expenses.
Finally, if you’re the type to keep past relationship baggage out of new relationship, rolling over an old 401k into a traditional IRA may make sense for you. With an IRA, your assets will have the same tax-advantage status and growth potential you had in the employer’s plan, but gives you access to more investment choices than are typically available. You can manage your investments on your own or partner with a professional.
If Craig and Naomi can get closure (#SouthernCharmSpoilerAlert), you can too. Ready to give up those ghosts? Contact Anne Simpson (email@example.com) to help you understand your options for your old 401ks.
Disclosure: Before deciding what to do with old 401(k) assets, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of FINRA website for additional information.