Your Forgotten 401(k) Does Your Retirement No Favors

NEW YORK (MainStreet) -- If you were leaving a job tomorrow, you'd take all the tchotchkes off your desk, your sweater off the back of the chair and that last iced tea you left in the break room fridge -- but what about your 401(k)?

Mike Lynch, vice president of strategic markets at The Hartford Fund, hosts seminars where he asks just that question: if you were leaving your job tomorrow, what are the three things you would you take with you? The answers range from desk photos and pictures to the far more trite “memories,” but Lynch says nobody ever offers a response related to their retirement plan. Whether you've been fired, laid off or are just switching jobs, Lynch says you're rarely calling a financial advisor or human resources on the way out the door to see what you can do with your retirement plan.

“We forget because there's nothing you have to do,” he says. “You don't have to check off a box or fill out a form, you just leave a company and the money stays behind and you forget about it.”

You also tend to leave this money behind, because you're used to putting your retirement plan on cruise control and not actively engaging in it. According to a study by Voya Financial of workers participating in an employer-sponsored retirement plan, one-third (33%) only save up to the amount their employer would match. Another one-in-five (20%) save an amount that was determined automatically by their employer, while a slightly smaller group (17%) contributed up to the maximum amount allowed by the plan. That's less than a third of you (29%) using any other method to save for retirement, and that isn't great.

“The way retirement plans are constructed today -- getting away from defined-benefit pension plans and into 401(k) defined contributions -- it really puts a lot of burden on the employee to take charge of their own retirement plans to meet their financial objectives,” says Mario Minotti, head of the Chicago-based Minotti Group, a retirement investment agency.

It isn't just 401(k) plans employees are leaving behind, either.

The Hartford's Lynch says that the average client has about three to four IRAs stacked up simply, because they've accumulated over time. Maybe a relative entered the financial planning business and you opened up an IRA to help him out. Maybe you were proactive enough to roll over a 401(k) from a previous employer into an IRA at your bank, but not active enough to simply remember it was there. Yes, this happens to folks who change jobs quite a bit, but it also happens to retirees who are trying to budget their retirement properly but are just now remembering that they have retirement plans with former employers that they've simply forgotten.

Both Lynch and Minotti note that workers really should get a handle on those floating retirement plans before they need to tap into them. For Lynch, it boils down to control, flexibility and personal need. If you just leave your old 401(k) behind, you're basically relinquishing control over how your retirement money is invested and where. You're also dooming it to whatever vehicle -- 401(k), IRA, Roth IRA, etc. -- it's currently in instead of placing it in separate accounts or a trust that may better suit your needs. Finally, you're basically losing the ability to assess the performance of that account and determine whether or not your assets would fare better elsewhere. That's bad not only for you, but also for your spouse or heirs should you not live long enough to collect.

“If a husband left his company company, left money in a 401(k) after he left the job and then dies, generally a spouse will keep it there and think 'if it was good enough for him, it's good enough for us,'” Lynch says. “That money is still in that old 401(k) plan and, if something happens to mom, the kids have options, but there's a stronger chance they'll be offered a lump-sum distribution that doesn't accumulate and has tax implications.”

Therefore, if you know you have an old retirement plan out there, the first step is to try to clean it up. Lynch notes that this is a fine opportunity to see if your old 401(k) or IRA would be better served in a new place. This is your opportunity to roll that money into a transitional IRA until you've found a new job and had a chance to look over your employer's retirement plan -- especially if your employer has a monthslong initiation period. If you'd prefer, it could be an opportunity to diversify by bringing money into an IRA or Roth IRA, depending on how comfortable you are with the latter's tax liability.

“The first thing to do when cleaning up an old 401(k) is to make sure your risk tolerance is in line with the portfolio allocation,” Minotti says.“We're coming off of a bull market, where people have gotten a little complacent with their 401(k)s because the market's been so strong and they haven't had to address them. With some volatility on the horizon, they should really make sure their portfolio is in line with their risk tolerance.”

Minotti notes this is also a fine time to debate the merits of options that may not have been available to you through your work plan. While the 401(k) is subject to ERISA [the Employee Retirement Income Security Act of 1974] provisions and doesn't allow creditors other than the federal government to lay claim to the assets in that plan, it's contestable whether or not an IRA is subject to that. Also, while you can take out a loan against your 401(k), loans from an IRA are typically limited to exceptions such as medical costs, college costs and first-home purchases.

However, if an employer has a plan that doesn't allow you to bring in money from the outside, has several fees associated with its 401(k) or doesn't match contributions, you might be better off getting everything under one roof and saving independently of your employer's plan.

“It's a good opportunity, when an employee terminates, to consolidate their accounts,” Minotti says. “Whether that means taking their 401(k) and rolling it over into a new employer's plan or starting an IRA and rolling it into that IRA, it's usually a good idea to consolidate so it's easier to keep their eye on things and keep up with how the account is performing in line with their investment objectives.”

However, no matter which path you choose, make sure you're rolling over your investment from the previous employer's retirement plan properly. Lynch says he's seen clients blow through the 60-day deadline for handing the rollover check from their former employer's plan provider into their new plan manager. He notes that's a hard deadline that leaves you on the hook for the income tax on your retirement savings if you miss it.

A better way to roll your savings over to a new plan is to make a trustee-to-trustee transfer in which the manager of your previous plan sends the check to your new financial company directly. If you're not switching into another employer's plan, it may be worth seeing what other options your previous employer's plan manager offers, if only to simplify the process.

“You don't even have to do an external rollover anymore. You can roll over your 401(k) into the same provider,” Minotti says. “If it's Fidelity, you can roll it into another Fidelity IRA, which is insanely quick.”

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Personal Finance

Women Need More Investing Confidence

Women Need More Investing Confidence

Retirees Make One Big Investing Mistake - Not Planning!

Retirees Make One Big Investing Mistake - Not Planning!

Top 7 Facebook Scams to Watch Out for in 2018

Top 7 Facebook Scams to Watch Out for in 2018

What Is an EBITDA Margin? Examples and How to Calculate

What Is an EBITDA Margin? Examples and How to Calculate

How to Buy a Car in 10 Steps With Tips For 2018

How to Buy a Car in 10 Steps With Tips For 2018