Should I Roll Over My Old 401(k)?

Know your options for the 401(k) you may have left behind at your prior job.

If you’ve switched jobs recently, you’re in good company. Approximately 14.8 million defined-contribution participants change jobs each year, according to ongoing research by the Retirement Clearinghouse and the Employee Benefit Research Institute,¹ reflecting the continued mobility of America’s workforce. While job switching surged during the pandemic, the trend has remained strong. For example, Pew Research reported that 30% of American workers changed jobs in 2022 alone.² This suggests a lot of people have 401(k)s with a previous employer. Some of those retirement plans have been long forgotten by the employees who left them behind; there are an estimated 24.3 million 401(k) orphaned accounts holding $1.35 trillion in assets.³

If you recently switched jobs, you may ask: What should you do with your old 401(k)?

Option 1: Do Nothing/Leave Your Money in Your Previous Employer’s 401(k)

When you separate from service with an employer, most 401(k) plans will allow you to leave your money in the plan as long as your account balance meets a minimum requirement (e.g., $5,000 or something similar). Leaving your money in your previous employer’s 401(k) is worth considering if you like the investment options and if the fees are reasonable. However, if your 401(k) isn’t fully vested when you leave your employer, you’re likely to forfeit all or some of the unvested funds. If there’s a chance you could be rehired by the same employer within five years, the company may allow your vesting schedule to pick up where you left off.

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Option 2: Roll Over Your Old 401(k) to Your New Employer’s 401(k)

You may be able to roll over the 401(k) from your previous employer into your new employer’s 401(k) plan. You’ll need to check with your plan administrator at your new employer to see if this is an option. Some plans are lenient about accepting rollovers, while others are more strict. This option is worth considering if you like the investment options at your new employer and if the fees are reasonable. This option allows you to simplify your financial life by consolidating your accounts.

Option 3: Roll Over Your Old 401(k) into an IRA

There are a number of reasons why you may choose to roll over your 401(k) into an IRA. For most people, their 401(k) is the largest asset they own besides their home, especially if they’ve been at the same employer for a while. With that in mind, it makes sense that many people would choose to roll over their 401(k) into an IRA so they can benefit from financial advice and ongoing monitoring of their account. While a typical 401(k) plan has 10-15 investment options to choose from, with an IRA you can choose among thousands of mutual funds and ETFs. If all of those choices feel overwhelming, you may want to speak to a financial professional who can help you select the most appropriate investments for your objectives.

A 401(k) is most people’s largest asset besides their home.

Option 4: Cash Out Your Old 401(k) and Pay the Penalties

Let’s be clear: Cashing out your old 401(k) is a terrible idea. But that doesn’t stop a lot of people from doing it. According to a University of British Columbia analysis, 41.4% of people cash out their 401(k) when they leave an employer.⁴ This behavior continues to be a major concern. Studies show that 85% of those who cash out drain their entire balance.⁵ What’s more, if you’re younger than 59½ and you take this route, the IRS will assess a 10% premature withdrawal penalty, plus the amount of the withdrawal will be added to your taxable income for the year.

Example: You’re 40 years old and have a 401(k) worth $30,000 at a previous employer. If you have the account paid out to you, you’ll be assessed a $3,000 penalty, plus the entire $30,000 will be added to your taxable income for the year. This could be especially costly if it bumps you into a higher tax bracket. Finally, your plan administrator is required to withhold 20% of your payment for taxes, so the amount paid out to you will be substantially less than $30,000.

In addition to the significant tax penalties, cashing out your 401(k) can result in a serious setback to your retirement savings. Diverting that money away from your retirement savings means that you’ll miss out on the power of compounding. You may need to save a lot more in the future to make up for the compound earnings you might have received if you’d stayed invested.

401(k) Rollover Considerations

Are you comfortable managing your investments, or would you benefit from professional advice?
Does your 401(k) have adequate investment options to build a diversified portfolio that’s personalized for your needs and preferences?
Do you prefer to minimize your paperwork and simplify your financial life by having all your investment accounts at one provider?
Are you willing to pay attention to notices from your 401(k) plan administrator about changes to the plan and its investment options?
Do you have a risk-management process to ensure you’re taking the appropriate amount of risk based on your age and investment goals?
Are you adjusting your investments as you get older or as your life circumstances change?
Do you know how much you’re paying in fees and fund expenses to stay in the 401(k)?

If you’re in the distribution phase of retirement:

Do you know which investments you should take distributions from to balance future growth potential with current income needs?
Do you know how much to withdraw each year to help ensure your portfolio lasts the rest of your life?

If you need help deciding what to do with your old 401(k), talk to your financial professional or tax consultant.

¹ Spencer Williams, Retirement Clearinghouse, 3/15/22. Most recent data available.

² Pew Research Center, 7/28/22. Most recent data available.

³ ”Are Automatic Rollovers the Way of the Future?”, Employee Benefit News, 5/16/23.

⁴ ”Are Automatic Rollovers the Way of the Future?”, Employee Benefit News, 5/16/23.

⁵ ”Too Many Employees Cash Out Their 401(k)s When Leaving a Job”, Harvard Business Review, 3/7/23.

Important Risks: Investing involves risk, including the possible loss of principal.• Diversification does not ensure a profit or protect against a loss in a declining market.

This communication is provided solely as general information and should be considered general investment education. None of the information provided should be regarded as investment advice or an investment recommendation. Neither Hartford Funds nor its affiliates are undertaking to provide impartial investment advice to any individual investor or retirement plan sponsor. If you are an individual investor or retirement plan sponsor, contact your financial professional or other fiduciary unrelated to Hartford Funds about whether any given investment product or strategy may be appropriate for your circumstances.

This information should not be considered investment advice or a recommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax, and financial condition of any specific person.

This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice.

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