If you've ever experienced the frustration and time-consuming nature of rolling over a 401(k), you are certainly not alone. The entire process can be convoluted yet avoiding the process can negatively impact retirement savings.
According to a survey by fintech company Capitalize, nearly 42% of the respondents claimed it took them two months or more to complete a 401(k) rollover. Only 22% were able to accomplish the process without seeking external help. With $1.1 trillion projected to roll over into IRAs and other 401(k)s this year alone, it's clear this hassle affects a significant number of workers.
Upon leaving a job, a worker has several options regarding their 401(k)-they can either leave the savings in their old employer’s plan, be forced out if the balance is small, or roll the money over to an IRA or their current employer's retirement plan. To do this, a check from the previous retirement plan provider is typically necessary, endorsing it to the new IRA custodian.
In the Capitalize study, around 80% of those surveyed needed to perform additional tasks such as making phone calls or filling out paperwork to complete their 401(k) rollover. Over half said they had to manage paperwork and 43% needed to receive and send a physical check.
Despite these complexities, it is widely recommended by financial experts to roll over funds from an old 401(k) when moving to a new employer. Foregoing this process can lead to forgotten 401(k) money. Past estimates from Capitalize reported approximately 29.2 million forgotten 401(k) accounts, containing around $1.65 trillion in assets as of May 2023.
Therefore, moving 401(k) funds to an IRA upon leaving a former employer is the recommended course of action. The transferred funds offer greater control, flexibility, and wider investment options compared to an employer-sponsored plan. However, the process doesn't end with the transfer-investing the funds in the new account is a crucial step that many tend to ignore. Not doing so can result in missing out on substantial investment growth-an issue highlighted in a recent Vanguard study which found that 28% of workers who successfully rolled over their 401(k)s into IRAs failed to invest and left their savings in cash for seven years or more.