Investing

After 9 years as a personal finance writer, I was shocked to discover I made a big mistake with my 401(k)

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Key Points
  • I left my 401(k) account in my old company's plan rather than rolling the money over into an IRA.
  • Earlier this year, I received a call from a brokerage I'd never worked with. My account had been forcibly rolled over, in cash, by my former employer.

For seven years, I wrote for a personal finance magazine, learning everything I could about investing and money management from more experienced journalists as well as hundreds of sources I interviewed for stories. Then In 2020, in the first big move of my career, I began writing for Grow.

Despite my background and knowledge, I made a financial goof when I switched jobs: I left my 401(k) sitting in my old plan instead of rolling it over into an IRA. I guess I had a little more to learn.

I had my reasons (which I'll get into) for leaving my account where it was, and financial experts don't believe doing so is a bad move in every single case. But by leaving my old 401(k) out of sight and out of mind, a huge chunk of my net worth was effectively out of my control — a fact that became crystal clear to me when I received a phone call from an unfamiliar number a few months ago.

My former employer had rolled my account, in cash, into an IRA for me.

Here's what happened, and why, after nearly a decade of writing about money, I realize I probably made the wrong move.

Why I left my 401(k) money in my old plan

Working at a personal finance magazine comes with certain perks, one of them being a roster of mutual funds in the 401(k) plan chosen by a committee of people who write about investing for a living. I loved my portfolio. The mix of top-rated funds I chose struck a balance between growth and value styles, large and small stocks, domestic and international strategies, and active and passive management.

Portfolios I held in other accounts, such as my IRA, were built to complement this one.

So when I left that job, I thought, why mess with a good thing? It's money I don't plan on touching until retirement anyway.

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That's not an invalid line of thinking, especially for people who otherwise may be tempted to use the money for non-retirement purposes, says Jared Snider, a certified financial planner and senior wealth advisor at Exencial Wealth Advisors in Oklahoma City, Oklahoma.

"If you know that rolling it out of the 401(k) to an IRA would increase your access, and thus your likelihood to deplete those dollars too quickly, keep in mind the reason for the dollars in the first place," he says. Rolling the money over "isn't for folks who see an accessible basket of money and think, 'Maybe it's time for a home remodel.'"

How my money got rolled out for me

Under certain circumstances, companies have the right to cash you out of their plan, whether you want them to or not. Generally, this is the case if you have less than $5,000 in your account. The reason: "These firms don't have to manage a ton of participants with low balances," points out Ben Gurwitz, a CFP and principal at Financial Life Advisors in San Antonio, Texas. "If you have more, they typically have to manage your account just like regular employees."

After saving prodigiously in my plan for years, I was in the clear on that front. Or so I thought.

Not long after I left, the old company's 401(k) switched custodians. Shortly after that, the company was acquired and, for ease of employee integration, shuttered their 401(k).

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The closure triggered two options for plan participants. They could take their money in the form of a physical check and deposit it with the financial institution of their choice, or they could do nothing and have their account rolled into an IRA.

As I was no longer an employee, learning about this wasn't as easy as sitting in on a meeting. I had changed addresses since I left the firm, so I didn't receive any mail notifying me of the change. Instead, I eventually got a call from a brokerage firm telling me that I had defaulted to option B, and was the proud owner of a new IRA.

The money was in cash, and I'd have to create an online profile with their firm and choose how to invest it.

Why rolling into an IRA was ultimately the smart move

The whole process illustrates the danger of not knowing exactly where your money is. Had I accidentally tossed a letter from a brokerage I don't do business with or ignored calls from a number I didn't recognize, I wouldn't have known than I had 7 years' worth of retirement savings sitting in cash and earning practically nothing.

Even if your former employer doesn't do something quite as dramatic as closing its retirement plan, it can still be tricky to stay in the loop about what's going on with your portfolio.

If the custodian changes, "you may end up calling 1-800 numbers, and it feels like a black box. You never deal with the same person, and it feels like your documents are lost in space," Devin Pope, a CFP and senior wealth advisor at Albion Financial in Salt Lake City, Utah, told Grow.

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Now that I've been forcibly rolled into an IRA, I realize it's what I would have been smart to do in the first place. For one thing, I now have direct access to all my investments, ensuring that I can properly calibrate my entire portfolio across all accounts based on my long-term plans and my evolving tolerance for risk.

With a few exceptions — some workplace plans give you access to funds that are otherwise closed to new investor money — I can invest in whichever funds I liked from my plan before.

Most importantly, having reinvested the cash rolled over from my old account, I'm once again set up to harness the power of compounding growth in a tax-advantage account until I'm ready to begin living off my portfolio in retirement.

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