EDITOR'S NOTE: This article was originally published in the December 2007 issue of Kiplinger's Retirement Report. To subscribe, click here.
If you're like many Americans, you've changed jobs a few times during your career. Perhaps you made contributions to several employer-sponsored 401(k) plans. When you left each company, you may have kept your account in place. If so, you're not alone. About one-fourth of Americans maintain at least one defined-contribution account with a former employer, according to a recent study by Fidelity Investments.
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And we're not talking small sums. The average account balance sitting in a former employer's plan is $64,000, and nearly 17% of those surveyed reported balances of more than $100,000. Half didn't even know how their money was being invested.
Depending on how many 401(k) accounts you own, you have several options. If you have only one account with a former employer, you could keep it there or transfer the money to the 401(k) plan of your current employer, if the company allows it. Or you can roll the money into an IRA.
Keeping multiple 401(k) accounts is generally a bad idea. You're best off consolidating the assets into an IRA. "You can see a total picture of those asset allocations and how those allocations are performing," says Mari Adam, a certified financial planner with Adam Financial Associates, in Boca Raton, Fla.
Locating a Lost 401(k)
Another reason to consolidate your accounts is that you're less likely to forget about the bits and pieces of your nest egg. "You lose track," says David Blanchett, a certified financial planner with Unified Trust Company, in Lexington, Ky. "When you retire, you have to figure out where all the money is."
That shouldn't be a big issue if you're getting regular statements from a plan's trustee, who is usually a company employee, or from an outside administrator, which is often a financial institution hired by the employer to run the plan. But if you've moved a couple of times, the plan may not know where you are. And if a former employer has gone out of business, you may have to do some digging.
Rest assured: Federal law protects your 401(k) assets. If your account totaled less than $5,000, your employer may have rolled the money into an IRA. The retirement plan is required to keep larger accounts in place until you move the money out.
If your former employer still exists, you can probably find it on the Internet. If you can't locate it, look for old account statements, which should list contact information for the administrator or trustee.
Still no luck? Your former employer may have moved, changed its name or merged with another company. FreeErisa.com provides access to Form 5500s, which 401(k) and other benefits plans covering 100 or more employees are required to file with the federal Department of Labor. The form includes the plan's contact information.
However, in some cases, companies "abandon" their 401(k) plans. A business, usually a small one, may have gone bankrupt, or perhaps the owner died and the company closed.
Companies that are going out of business are required to notify current and former employees that the plan will be terminated and that the benefits will be distributed. Even if the trustee has lost his or her job, the trustee still has fiduciary duty to distribute the plan's assets. But sometimes the trustee doesn't realize this obligation and the plan is considered to be abandoned, according to Rick Meigs, president of 401khelpcenter.com.
Until recently, an outside administrator wasn't allowed to notify employees that a plan was abandoned. Employees who wanted to withdraw their money had to hunt down the trustee to get the money distributed. If the trustee could not be found, the Department of Labor typically went to court to terminate the plan and distribute the benefits.
But new federal rules allow the administrator to contact former employees and to distribute the benefits. If you run into snags retrieving your assets, get in touch with the Labor Department's Employee Benefits Security Administration at 866-444-3272.
If you think your plan may have been abandoned, search the department's database of abandoned plans (www.askebsa.dol.gov/abandonedplansearch) by plan name, employer name or location. Also, the Pension Rights Center offers free help with tracking down a 401(k) account at www.pensionrights.org/help.
To avoid potential problems, keep the plan administrator informed of your latest address if you decide to keep your money in the 401(k) after you leave the company. If you do, "it should be relatively easy to collect the money," says Elena Barone, an associate counsel with the Investment Company Institute, which represents the mutual fund industry.
To Roll or Not to Roll
Even if you have only one 401(k) with a former employer, it usually makes sense to roll the assets into an IRA. For one thing, the typical 401(k) provides limited investment choices. "If you're interested in a variety of investments, you're better off with an IRA," says Twila Slesnick, co-author of IRAs, 401(k)s and Other Retirement Plans (Nolo, $35).
Also, access to your 401(k) assets in retirement might be limited by rules governing that particular plan. For example, some plans won't permit you to take distributions more often than quarterly.
You can roll assets from one or more 401(k) plans into an IRA you already own or one established for the rollover. Ask each company to directly transfer the balance to the IRA. Make sure the company does not write a check to you. If it does, 20% of the balance will be withheld for the IRS. Any part of the payout -- including assets to replace the money withheld -- not safely in an IRA within 60 days is considered a taxable withdrawal.
Still, there may be reasons to keep some assets in an old 401(k) if you plan to retire between age 55 and 60 and need the money for living expenses. You can take penalty-free withdrawals from your 401(k) as early as age 55. If you roll the money into an IRA and withdraw from it before age 59 1/2, you'll pay a 10% penalty. "If you think you are going to quit working at 55 or 57, you should give serious thought to staying inside that 401(k), unless you're 100% sure you don't need the money," says Adam.