The typical American will have worked at seven employers over the course of their careers, accruing all sorts of experience but often leaving behind something hard to replace: their retirement savings accounts.
It’s a big problem: Whether it’s inertia, neglect or simple forgetfulness, 15 million orphaned 401(k) accounts representing more than $1 trillion in investment dollars littered the financial landscape in 2010.
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According to an ING Direct USA survey, 50 percent of American adults who’ve participated in a 401(k) or equivalent retirement plan left an account at a previous employer.
Nearly a quarter of those left between $10,000 and $50,000 in these accounts. Eleven percent of those surveyed said they didn’t know or couldn’t remember how much money was left in these old accounts.
It’s not just a problem of leaving money behind. There’s also the concern that the investment choices made in a 401(k) account opened in your 20s is out of whack with your age and attitude toward investing.
The Employee Benefit Research Institute found that workers with more than one kind of retirement investment generally keep a higher percentage of their funds in stocks than those who have one kind of account.
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That suggests a lack of balance with more stable, interest-bearing assets, like bonds in stock-heavy IRAs that are often old 401(k)s rolled over for safekeeping as workers left a job and never updated.
So what should people be doing with these orphaned accounts?
The worst thing they can do is cash them out, said Robert Henderson, president of Lansdowne Wealth Management in Mystic, Conn.
The second-worst? Just leave them there untouched.
Clients will sometimes approach Henderson and tell him they have $5,000 in one account and $30,000 in another account.
“It may seem small at the time, especially if you’re young, but that’s a good start to a nest egg. If you just cash them out every time you leave your employer, even if it is not very big, you are not feeding that nest egg for the long-term,” he said.
Those who opt to cash their accounts out when they leave a job will, of course, face taxes on them. If they are younger than 55 at the time, they also will pay a 10 percent penalty on that money for early withdrawal.
Given all of that, advisors recommend people consolidate their past accounts into a self-directed IRA or move them into their latest employer’s 401(k) plan. That way the money isn’t out of sight or out of mind.