401(k) retirement accounts: Changing jobs? This 401(k) mistake could cost you big — read before you cash out
As Kiplinger notes, approximately 15 to 20 million workers change jobs and deal with new retirement plans each year. People also move homes a lot, which adds to the confusion. Americans move house an average of 11 times in their lifetime. Approximately 15 to 25 million retirement account holders change addresses each year.
Approximately 4 to 6 million Americans retire each year. Approximately 60% to 70% of these retirees have some type of retirement savings plan. People have many different retirement accounts due to job changes, house moves, and retirement.
system problem
The pension system is not well connected because different companies use different technologies. These systems often do not “talk” to each other properly. The system involves millions of savers and many service providers, making it complex. Because of this complexity, people find it easier to leave their old 401(k) accounts behind, according to the Kiplinger report.
Moving money from one plan to another is slow and confusing. Outdated technology systems make the process even more error-prone. Even when companies upgrade their systems, they still have to deal with other people’s legacy systems. This creates “friction,” meaning unnecessary difficulty in managing retirement savings.
Inactive and “lost” accounts
Many people leave money in their old employer accounts after changing jobs. The share of inactive retirement accounts increased from 21.1% in 2010 to 29.2% in 2023, Kiplinger noted. This means that almost a third of accounts are inactive. But being inactive doesn’t always mean being forgotten. Some people keep old accounts because the fees are low or the investments are good. Therefore, calling all inactive accounts “lost” is misleading.
The real signal of the problem
A better sign of a lost account is when mail is returned because the address is incorrect. According to Boston Research Technologies & Retirement Clearinghouse via Kiplinger, the returned mails indicate that communication was impaired. Even then, this does not always mean that the person has forgotten the account.
Small account rules and risks
Accounts under $1,000 can be automatically converted into cash. According to Kiplinger, if no action is taken, accounts under $ 7,000 can be moved to secure accounts. These rules were put in place to make things easier for companies. But they can create problems for workers later. If contact information is incorrect, people may not even know their money has been transferred.
Loss due to cash outflow
Even small withdrawals can seriously harm future savings. A 25-year-old who cashes out $750 today could lose $9,312 when he retires. This assumes money can grow at 6.5% annually.
Money withdrawal problem
Many workers cash out their 401(k)s when they change jobs. This is because transferring money is difficult. Converting to cash incurs taxes and penalties. It also reduces long-term retirement savings.
The big impact of not withdrawing money
Keeping $7,000 invested starting at age 25 could grow to $86,912 by age 65. As Kiplinger notes, holding three such accounts can grow to $157,878.
Who earns more money?
At least 33% of people withdraw money after changing jobs. Younger workers (20-29) cash out at a higher rate of 44%. Those making $20,000-$30,000 cash out 50%. Spanish workers withdraw cash at a rate of 57%. Black workers earn 63% cash, according to Kiplinger.
Solutions are being produced
The industry is now trying to solve these problems with better digital systems. New systems aim to make money transfer faster and easier. One key solution is “automatic portability.” This automatically transfers small balances to a new employer’s plan. It works unless the employee chooses to give up. The goal is to prevent people from withdrawing money or forgetting their accounts.
A system called the Portability Services Network has been put into operation. It helps companies move retirement money seamlessly.
What workers should do
Workers should ask how their retirement money will be handled when they change jobs. They should also check the options for combining multiple accounts. This helps prevent unnecessary cash outflows.
The point is not that people forget about their money. The real problem is that the system makes it very difficult to manage and move this money. Fixing the system and making transfers easier is more important than worrying about “lost accounts,” according to the Kiplinger report.
FAQ
Q1. Why do people lose track of their 401(k) accounts?
People lose track because they change jobs and homes frequently and the system is not well connected.
Q2. Is it bad to cash out a 401(k) after changing jobs?
Yes, withdrawing money early can reduce future savings and also lead to taxes and penalties.
