Jul 17, 2023
One simple, common mistake millions of Americans make when switching jobs is costing them thousands of dollars every year.
A 401(k) plan — especially with employer matching — is an enticing benefit for job seekers. But it turns out, many leave those accounts behind as soon as they move on to the next opportunity.
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As of May 2023, there were around 29.2 million forgotten 401(k) accounts holding approximately $1.65 trillion in assets — up from 24.3 million and $1.35 trillion in May 2021, according to Capitalize, a retirement account rollover platform.
While millions of American workers use this type of account as their go-to retirement savings tool, many of them don’t fully understand how their accounts are managed — especially relating to how their money is invested, or that it can be transferred and rolled over for optimal savings.
And that lack of awareness could cost you several hundred thousand dollars and worst yet, threaten your financial security in retirement.
Forgotten 401(k) accounts
During “The Great Resignation” — a period of intense job switching triggered by a post-COVID employment boom — a record 45 million Americans switched jobs in 2021 and another 47 million in 2022, according to Capitalize’s analysis of Bureau of Labor Statistics (BLS) data.
Capitalize found that 44% of people who changed jobs during that time had active 401(k) accounts, meaning that approximately 19.7 million 401(k) accounts were “in motion” in 2021 and another 20.8 million in 2022.
Of those retirement accounts, in 2021, nearly 3.8 million were left behind and another 4.4 million were abandoned in 2022 — suggesting that 1-in-5 job-changers either forgot about their retirement savings or chose to defer the decision about what to do with them until a later date.
While rolling over 401(k)s when you switch jobs can be time-consuming, confusing and stressful, waiting to make a move to claim your money can come at a steep price. When 401(k)s are left to stagnate, they often miss out on higher returns and incur higher-than-necessary fees, according to Capitalize.
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The fees, in this case, could be investment fees like expense ratios on index funds or exchange-traded funds (ETFs), or they could be administrative and advisory fees associated with the 401(k) plan.
Meanwhile, the returns could be jeopardized by poor asset allocation — especially if you forget about your 401(k) and it remains stuck in a low-yielding portfolio like a money market mutual fund.
Capitalize has conducted multiple analyses into the potential opportunity costs of leaving behind money in badly managed, forgotten 401(k)s. It found that individual savers could miss out on several hundred thousand dollars in foregone retirement savings over 30 years. In 2021, they calculated that amount to be $700,000.
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Protect your retirement assets
Many Americans will work a number of different jobs throughout their lives, but that doesn’t have to mean sacrificing their 401(k)s every time they make a move.
Typically, account holders have four options for what to do with their employer-sponsored retirement savings when switching jobs. But out of those options, financial advisers would only endorse two strategies — and in most cases, they’d strongly advise against the other two.
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- Roll your 401(k) savings over to an individual retirement account (IRA);
- Roll your 401(k) savings into a new 401(k) — provided your new employer allows that;
- Cash out your 401(k); or
- Leave your 401(k) savings behind.
IRAs are playing an increasingly important role in helping Americans save for retirement, especially as workers now change jobs more frequently over the span of their careers. More than 4-in-10 U.S. households had IRAs in mid-2022, according to a recent Investment Company Institute study. With $11.7 trillion in assets, IRAs represented 34% of U.S. total retirement market assets, compared with 24% two decades ago and 18% three decades ago.
With an IRA, (IRA) you can continue growing your nest egg tax-free until you make withdrawals in retirement. And better yet, having one of these accounts won’t stop you from participating in any new or current 401(k)s you have at work.
Transferring your assets to your new employer’s plan is another good option — but not all companies allow this. Typically, you can roll your assets over without incurring taxes or penalties — and then you can work with your new employer’s plan administrator to allocate your savings into the new investment options.
As for the less-than-ideal options, cashing out your 401(k) early — whether it's because you’re changing employers or desperately need the funds — is something personal finance experts consider one of the worst financial fumbles you can make.
It’s problematic for multiple reasons: you’ll have to pay the associated taxes and penalties, and on top of that, you’ll lose out on the benefits of compound interest. In the end, it might make the difference between saving enough money to retire and having to hustle for years longer.
As for leaving your 401(k) behind, you may well lose track of your investments, as the Capitalize study suggests — and lose out on a huge sum of money, which could really dull some of the shine on your golden years.
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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.
