Officially, spring started on Tuesday, March 19. Perhaps it doesn’t feel that way in some parts of the country, but rest assured, warmer temperatures are on the way. With the arrival of spring comes talk about spring cleaning, but before tending to housework, many clients probably ought to look at sprucing up their personal finances.
That includes taking care of old 401(k) plans and this is a task that advisors can certainly help clients with. Chances are clients that have been with an advisor for long period of time have changed jobs at least once during that stretch. Over the average working life, a person could have as many as 12 jobs, potentially opening the door for a lot of old employer-sponsored retirement plans to be taken care of.
On a related note, advisors should be aware that recent polling indicates half of working Americans are considering new careers, meaning a job change and a current 401(k) becoming an old 401(k). That implies advisors have work to do with assisting clients in keeping track of old 401(k) plans and deploying that capital in ways that best serve the client.
Don’t Forget the Orphans
Abandoned 401(k)s are often referred to as “orphans” – an appropriate colloquialism, but one that doesn’t adequately articulate the gravity of the situation.
“If you have one of these orphan 401(k)s, you’re not alone. One study estimates about $1.65 trillion is sitting in abandoned accounts, representing the savings of 30 million workers,” notes Mark Miller of Morningstar.
Obviously, 30 million and $1.65 trillion are big numbers with former implying advisors likely already have clients that have orphan 401(k)s and the latter implying there’s significant opportunity for advisors to bring more assets in the door with existing clients. Two positives to be sure and there are compelling reasons for advisors to inquire about a client having an orphaned employer-sponsored retirement plan and those reasons primarily benefit the client.
“The problem is most acute for people who leave behind small accounts,” adds Miller. “Employers are permitted to transfer orphan accounts that hold less than $7,000 into IRAs that may earn low returns in money market funds and charge high fees—and most do so to trim plan administration costs. Over time, these accounts can simply waste away.”
Other 401(k) Maintenance Issues of Note to Advisors
The Secure 2.0 retirement law is another example of why advisors should be talking about abandoned retirement accounts with clients. That law raised the automatic rollover amount to $7,000 from $5,000, meaning millions of smaller accounts could be rolled over into nothing more than cash or money markets, leading to lost opportunity for clients that aren’t on the ball.
Tracking orphaned 401(k)s will get easier when the Labor Department rolls out a database dedicated to that task. That’s expected to happen later this year. For clients with multiple old 401(k) plans, it pays to get those funds into a single IRA for the purposes of enhanced efficiencies and security.
“Simply establish a single, low-cost IRA where you can roll over smaller balances as you move through various jobs. This can be a good way to stay organized and avoid losing track of your money,” concludes Miller.
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