Why Having Multiple 401(k) Plans Is a Bad Idea
There are too many 401(k)s laying around!
Can you have more than one 401(k) account?
Yes, you can, but having multiple 401(k) plans floating around isn’t a good idea and should be avoided. Over the 1994-2014 period, 25 million 401(k) holders separated from an employer and left at least one account behind and several millions of those holders left two or more 401(k)s behind. A combination of limited portability of old 401(k) funds into new 401(k) plans, potential for forced-transfer into an IRA account, and automatic enrollment into new 401(k) plans sets the stage for more and more Americans owning multiple 401(k) plans throughout their careers.
Here’s an example of how you can end up with multiple 401(k) retirement accounts:
On your first job, you signed up for your employer-sponsored 401(k) and accumulated a balance of $1,500 after two years. At that point, you accepted a dream job all the way across the country and had to arrange a big move. With so many moving pieces you forgot about your 401(k) and left no instructions to your plan’s administrator.
On your second job, you’re automatically enrolled in a new 401(K) and accumulated a balance of $9,000 over a four-year period. Fast forward to today, you decide to accept a new job offer and find that the third employer’s qualified plan doesn’t accept rollovers from other 401(k) plans. Since you’re happy with the 401(k) from your second employer, you decide to leave the $9,000 there. You remember your 401(k) from your first job, and you contact the plan administrator and find out that the balance of that account is now at a forced-transfer IRA.
In summary, now you have:
- A forced-transfer IRA account from your first employer
- A 401(k) from your second employer
- A 401(k) from your current employer
Maintaining multiple 401(k) plans hurts your nest egg, and there are many reasons why keeping several 401(k) plans is a bad idea.
Missing critical notices from your plan administrator
In our example with three jobs, you would receive at least nine different notices from the three different plan administrators. The U.S. Government Accountability Office (GAO) estimates that, even without any further job changes, you would receive between 40 to 70 separate documents over a 10-year period. From a hike in management fees of the target fund holding the majority of your funds to a termination of a key fund, you’d be too late to make and execute the right decision.
Losing track of your 401(k) plans
When you leave an employer, it’s your responsibility to keep your employer updated with your current mailing address or email. When a plan administrator loses track of a participant, she may transfer the search costs and applicable penalty fees to the participant. Across the 401(k) industry, there is no standard on what constitutes a “good faith effort” to locate a participant. So, some plans may give up the search sooner than others.
Additionally, you should be monitoring your 401(k)s’ performance every few months, and this becomes much more difficult to remember to do if you have multiple accounts to keep track of.
Becoming a victim of a cash out or move to a forced-transfer IRA
When you leave in a hurry, like we described in the move to the second job from our example, failing to provide clear instructions on what to do with your 401(k) can come back to bite you in the near future. According to a Plan Sponsor Council of America survey of 613 plans with 8 million participants, 57% of 401(k) plans with balances between $1,000 and $5,000 are forcefully transferred to an IRA of the plan’s choosing when the owner of the 401(k) doesn’t indicate what to do after separation from employment.
Imagine your plan administrator having no mailing address for you and trying to mail you a cash out check. Once the check is cut, you’re liable for the income taxes, early penalty fee when under age 59 ½, and additional penalties and taxes from your state, if applicable. On the other hand, a forced-transfer IRA is no better: the GAO warns that high fees and low returns can make plans with low balances decrease to $0 within a period of 30 years.
Paying more fees for your multiple 401(k) accounts
Of course, 401(k) and IRA accounts aren’t free. Each and every investment option in your 401(k) can have an investment fee. Some of those charges are higher than others. Why would you keep your funds in a forced-transfer IRA that charges you 0.38% per year for investing in an index fund, when your current 401(k) charges you just 0.19% per year for investing in a very similar index fund?
Additionally, the GAO reports that administrative fees range from $0 to $115 per year. The more 401(k) plans that you hold, the more that you can potentially pay in administrative fees.
Beware 401(k) plans that only offer you a target-date fund. A study found that 65% of target-date funds charged between $40 and $119 in fees for a $10,000 investment. Even worse, 12% of the analyzed target-date funds charged $160 or more in fees for the same size of investment.
How can you avoid ending up with multiple 401(k) plans? Now that you know the disadvantages of keeping several retirement accounts, here’s your step-by-step game plan to prevent this from happening.
Solution 1: Explore all of your 401(k) rollover options
When separating from an employer, you have more options than just keeping the old 401(k) as is or rolling it over to a new 401(k). From rolling over to a Roth 401(k) or to a traditional IRA, evaluate all of your available options so that you can consolidate your nest egg on the account most suitable to your retirement saving strategy.
For more details, read:
- How to Roll Over Your 401(k)
- HR Checklist for Your Last Day of Work
- Should I Roll Over my 401(k) into an IRA?
Solution 2: Update your contact information and leave clear instructions
In the event that it makes financial sense to keep an old 401(k), make sure to keep your mailing address and email up-to-date! That way you won’t miss out on any important notices, be able to act in a timely fashion, and prevent the dreaded absent participant status.
To further prevent a move to a forced-transfer IRA, provide clear instructions that you’re not interested in such a move without your prior consent. This is key for 401(k) plans with a total balance under $5,000.
Solution 3: Find your old 401(k) accounts from multiple employers
The Social Security Administration (SSA) can help you track down all of your 401(k) accounts. However, very few Americans are aware of this benefit. According to the SSA, in 2013 over 33 million individuals could have potential benefits from past retirement accounts but only 760 filed a Potential Private Retirement Benefit Information Notice.
While you’ll receive this notice once your file Social Security benefits, you can request it earlier to find out information about your former 401(k) plans. In the event that you can’t locate the plan administrator at the address shown on the notice, contact your former employer for the current address. If you can’t locate your former employer due to a merger, acquisition, or change of address, contact your State’s corporation commission.
Once you have tracked down any old 401(k) plans, you’ll be ready to evaluate them and try to consolidate them as much as possible.
By keeping the number of your retirement accounts to a minimum, you’ll have more control over your nest egg and you’ll avoid paying more than you have to for the returns that match your financial needs.
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