Participants in 401k Plans have a handful of options regarding the handling of their account balances upon retirement or separation from service. These options include doing nothing. Often former employees are allowed to leave their retirement money in the 401k plan of their previous employer. Another option is to rollover or transfer the money to another retirement account, such as a new employer’s 401k or an IRA. Of course, there is also the option to withdraw the money either via a lump sum or by electing to take an annuity.
However, for lower account balances, often less than $5,000, the plan sponsor may automatically rollover the 401k balance to a Rollover IRA without the participant’s authorization. What this means is the participant is no longer part of the employer’s plan and is subject to different rules compared to the 401k. In addition, the investment allocation for the new Rollover IRA may default to a Target Date Fund or even cash, therefore changing the investment strategy of the account without the participant even knowing.
These lower account balances can result from a variety of different factors. These include late employer matches that are paid after the date of separation or partially vested balances for employees who only worked for the employer for a short time.
Given this common problem, we always recommend taking inventory of all your accounts so that any smaller balances are accounted for and invested based on your financial goals.