How to Manage Your Retirement Savings After Job Changes
The trend of job-hopping among Americans has led to a noticeable increase in abandoned 401(k) plans, especially following the Great Resignation. Research highlights that many individuals are leaving retirement savings behind when they transition to new employment, creating a significant concern for their financial future.
The Rise in Forgotten 401(k) Accounts
As of 2023, approximately 29.2 million 401(k) accounts, collectively holding around $1.65 trillion in assets, have been left behind by workers, representing a 20% increase from just two years prior. A report by Vanguard indicated that nearly half of all employees choose to leave some of their retirement funds in their previous employers’ plans when changing jobs.
However, neglecting these accounts can incur unseen costs.
Understanding 401(k) Fees
A surprising discovery is that 41% of workers remain unaware of the fees associated with their 401(k) accounts, as found in a 2021 study by the U.S. Government Accountability Office. While most fees are relatively low and depend on the plan, abandoned 401(k)s can come with additional charges that impact long-term savings.
Former employees who keep their 401(k) plans may face extra maintenance fees. Romi Savova, CEO of PensionBee, points out that if an employee does not transfer their account, the employer may transfer the record-keeping costs to the individual. According to PensionBee’s research, even a minimal monthly fee of $4.55 can accumulate to nearly $18,000 lost in retirement funds over time. In addition to these fees, individuals can miss out on the compound growth their savings would have achieved.
What to Consider with Old 401(k)s
When transitioning to a new job, there are several ways to manage your retirement savings. Workers often have the option to transfer their old 401(k) funds to a new employer’s retirement plan or roll them into an Individual Retirement Account (IRA).
Yet, it’s important to note that IRAs can sometimes have higher investment fees compared to 401(k) accounts. A study by The Pew Charitable Trusts found that rolling funds into IRAs could potentially lead to an estimated $45.5 billion in additional fees for workers over a typical 25-year retirement span. Cashing out an old 401(k) is generally seen as the least favorable option due to substantial tax penalties, yet research shows that around 33% of workers still choose this path.
Locating Abandoned 401(k) Accounts
Leaving retirement funds in a former employer’s plan is often perceived as the simplest choice. However, the increasing number of forgotten plans raises the risk of losing track of these savings. Current data indicates that around 25% of all 401(k) assets end up abandoned or overlooked, a rise from 20% two years prior.
To aid workers in rediscovering old retirement plans, the Department of Labor has introduced a retirement savings "lost and found" database as part of the "Secure 2.0" initiative. Experts advise that companies must provide regular statements to their employees, making it easier to retrieve these records if contact details are properly updated. Additionally, individuals can use their Social Security numbers to search for lost funds through the National Registry of Unclaimed Retirement Benefits, a private database dedicated to this purpose.
New Solutions for 401(k) Portability
In 2022, key 401(k) plan administrators initiated the Portability Services Network, collaborating with Retirement Clearinghouse to facilitate auto portability. This innovative solution aims to automatically transfer small-balance 401(k)s (typically those under $7,000) into a new employer’s retirement account whenever an employee changes jobs. The goal is to help individuals keep their retirement savings consolidated and reduce the risk of loss during job transitions.
By staying informed about these options and managing retirement savings effectively, individuals can ensure their financial future remains secure, even amid ongoing changes in their employment status.
