American workers who leave their jobs without deciding what to do with their 401(k) could be among the workers losing up to $2 trillion in retirement savings. When you leave your job without rolling over the 401(k) to the new employer’s 401(k) or IRA, the former employer may move the money to an unmanaged IRA of its choice. It costs money to manage a 401(k) plan, and since you are no longer contributing to the retirement account, the employer forces a transfer to an IRA to cut on costs.
If your 401(k) balance is less than $5000 when you leave a job, it may be at risk of disappearing. Employers are allowed to push out 401(k) accounts held by former employees if they have a balance below $5,000, and the participant has not given instructions on what to do with the money. These accounts are often transferred to the employer’s selected IRAs. While this move may be intended to safeguard an employee’s retirement money, it can have various unintended consequences including funds getting depleted due to high fees and low returns from investments.
What Happens to 401(k) When You Change Employers
When you quit or leave for another job, your former employer can decide to cash out, force transfer, or retain your 401(k) money. If your 401(k) balance is below $1000 when you leave, the employer will force cash out and send you a check with your balance with taxes taken out. You must deposit the check to your IRA account within 60 days, or else the funds will be considered a withdrawal, and you will owe income taxes and a penalty if you are below 59 ½.
If your 401(k) balance is more than $1000 but below $5,000, the employer can move the retirement money into an IRA of their choice. The plan administrator must notify you before moving your money. If you don't take any action, the employer will transfer the money based on the rules spelled out in the summary plan description.
When determining the 401(k) account balance, the plan administrator considers the money deposited into the fund from salary deferrals. It excludes funds rolled over from old 401(k)s. For example, if your 401(k) balance is $9000, and of this amount, $6,000 was rolled over from a previous employer, it means that your actual contribution from salary deferrals is $3,000. The employer considers the 401(k) balance as $3,000 and not $9,000. When you quit your job, the employer could still move your retirement money to a forced-transfer IRA.
What Happens If 401(k) Plan Shuts Down?
If your employer shuts down or goes out of business, you may be worried that your 401(k) could disappear. However, 401(k) assets are protected under federal law, and companies are required to separate retirement assets from their business assets. If a company shuts down, the management cannot tap into the 401(k) assets to pay creditors or pay employee's salaries. If the company withheld some 401(k) contributions and has not yet deposited the money into the 401(k) plan, these funds are at risk of misuse.
If your employer has shut down and the 401(k) plan is terminated, you should decide what to do to keep growing your funds. You can opt to cash out your retirement savings, but you will owe taxes and penalties on the money. Alternatively, you can rollover the 401(k) money to an IRA account to avoid paying taxes and penalties on the transfer. This option also safeguards your retirement money by ensuring it remains in a retirement account.
Is Your 401(k) Money at Risk?
When you make contributions to your 401(k) account, the employer deducts the money from your paycheck and sends it to the plan sponsor for investment. Usually, the employer may deduct and withhold the funds, and only send them at the end of a specific period, either a month or quarter.
Also, if the employer offers matching contributions, it may wait until the tax filing deadline of the year you earned the match to deposit the money. If the company shuts down or files for bankruptcy during this period, your funds will be at risk.
Your retirement money may also be at risk if you invested your 401(k) money in the company’s stock. If the company shuts down or files for bankruptcy, the company stocks will have no value. Therefore, you will lose the 401(k) money that was invested in the company’s stock.
How to Find Lost 401(k)
If a former employer has shut down, gone out of business, or acquired by another company, it may be difficult to track the 401(k).
Here are several methods to help you find your old 401(k):
Locate your former employer
The first step in finding a lost 401(k) account is to find the former employer. Start by contacting the employer, specifically the HR department, to find information on the whereabouts of your 401(k) account.
Usually, before transferring 401(k) money to a forced IRA, an employer will try sending mail to the former employee to alert him/her about the transfer. If your address has changed, you likely missed out on those notifications, and as a result, the employer transferred the funds to a separate unmanaged retirement plan.
Contact the 401(k) plan sponsor
If your old employer shut down its business, you should contact the plan sponsor of your 401(k) plan. You can find the plan sponsor's name on your old 401(k) statement.
You can contact the plan sponsor directly or by logging in to the 401(k) provider’s website to see if your account is still active. If you can’t find your retirement account, ask the plan sponsor if the 401(k) account was transferred to a forced IRA, and request information on where to find it.
Check the National Registry of Unclaimed Retirement Benefits
If your former employer and 401(k) plan sponsor are unavailable, you can try searching your lost 401(k) in the National Registry of Unclaimed Retirement Benefits. This registry keeps a record of retirement accounts that were left behind by former employees.
The National Registry is free to use, and you can search the available records using your social security number. It is available to both former government and non-government employees who left balances in their old 401(k) accounts.
Check the Department of Labor website
You can also use the Department of Labor website to find the old 401(k) plan sponsor's tax filings. You can search the plan sponsor's Form 5500 using its EIN or the plan name. Form 5500 should provide the plan sponsor’s contact information that you can use to contact the plan sponsor directly to get information about your old 401(k) account.
Check the Abandoned Plan Database
The DOL’s abandoned plan database keeps a record of benefits from retirement plans that have been terminated by their employers. You can search the database using the plan name or employer name. The search will provide the name of the Qualified Termination Administrator who is responsible for terminating the plan. You can then contact the responsible party to help you find your 401(k) money.
