Corralling Multiple 401k Accounts Into Your Retirement Plan

Between the ages of 18 and 24, people change jobs an average of 5.7 times. Between age 25 and 34, job movement slows a bit to an average of 2.4. Participating in a 401k plan at even half of those employers would yield four different retirement accounts by the age of 35.

Is it legal to have more than one 401k? Yes. Is it advisable? That depends on whether the investments stay aligned with your overall retirement plan and whether the cost of fees is justified given how the plan is performing. The more 401k accounts you have, the harder it may be to keep track and direct your investments.

Here’s what you should know about your options:

• Your former employer can force you to leave their 401k plan. Each plan sponsor sets its own mandatory “cash-out” thresholds, based on the vested balance. Regulations allow the cash-out threshold to be set as high as $5,000, and they also allow a plan sponsor to elect no cash-out provisions at all. Employers that set the threshold at more than $1,000 must roll vested balances between $1,000 and $5,000 into an individual retirement account (IRA) established on behalf of the former employee, while anything below $1,000 can be cashed out via a check to the participant.
  
  
• You’ll get at least 30 days’ notice before any involuntary distribution, asking you to choose a cash distribution or rollover into an IRA or new qualified plan of your choice (e.g., a 401k at your new employer). You can choose the institution at which you house the IRA.
  
  
• Cashing out will cost you. It is a “taxable event,” incurring a mandatory 20% federal withholding, 10% early withdrawal penalty before age 59 ½, plus any state income taxes.
  
  
• Rolling it over to a different 401k or an IRA avoids this taxable event. But you must get it into a qualified account within 60 days from the date you receive your retirement plan distribution.
  
  
• If you roll it into an IRA, it will generally start out as cash, and your financial advisor can help you decide whether to invest it and how. Your advisor can help you find similar investments to those in your previous 401k and adjust them periodically based on your total retirement savings plan.
  
  
• An IRA created from a rolled 401k account can be rolled into a 401k at a new employer, as long as you haven’t made any contributions to it since leaving the plan. So if you’re between jobs – perhaps earning freelance income – and you anticipate future employment with corporate benefits, it may make sense to contribute to a separate IRA in the meantime to preserve the option to roll it into a new 401k.
  
  
• You can roll multiple 401k accounts into one IRA. This avoids taxable events and consolidates multiple retirement accounts into one, making it simpler to allocate funds, see the diversity of your investments and streamline statements and fees. If you take this option, you won’t be able to roll the IRA into a new 401k, however.
  
  
• If you meet the vested balance threshold to leave it in your former employer’s 401k plan and you choose to do that, keep tabs on it.
  
  
  • Make sure you pay attention to the funds it’s invested in, how much it is growing, and the fees you are paying to keep it there. Ask for the fee disclosures and seek help from a trusted advisor if you don’t understand them.
    
    
  • Review the 401k with your financial advisor annually to be sure the asset allocation matches your objectives as you move closer to retirement. Risk tolerance is higher for younger workers who have decades until they retire and tends to decrease over time as retirement age approaches.

No matter what you decide to do with past 401k accounts, the most important thing is to save consistently for retirement, month after month, year after year. Keep the momentum you started as a young professional and increase your saving as your earned income grows.

Ginny DeBardeleben is a retirement plan advisor with Pinnacle’s trust and investment services team. She is based at the firm’s Symphony Place office in downtown Nashville and can be reached by phone at 615-743-8809 or by email at Ginny.DeBardeleben@pnfp.com.