The Disadvantages of Leaving Your 401(k) With a Past Employer

by Angie Mohr, studioD

If you work at different jobs during the course of your career, you could end up with several different 401(k) pensions plans, each with small amounts of money in it. Managing them all, and even keeping track of them can be unwieldly. Most employees have options for managing their plans when they leave their employer.

401(k) Rules

If you have an employer-sponsored 401(k) plan and you leave your employer, you have options as to what to do with the funds. You can leave them in the plan, unless the value is less than $5,000, in which case, you are required to withdraw or roll over the funds. You can also roll over the funds into either your new employer's 401(k) plan or into an individual retirement account (IRA). Your final option is to withdraw the funds, but this results in taxable income and in a 10 percent penalty assessment if you are younger than 59 1/2.

Lack of Control

Each 401(k) plan is different, but many have restrictions on how active you can be at managing the portfolio. There can be limited investment choices, and you may only be able to make changes once a year. Rolling over the funds into your own IRA gives you more flexibility to invest. Before making the decision, check the terms of your 401(k) plan, and make sure that you open an IRA that allows you to be as active as you choose in selecting and managing the underlying investments.


If you have many jobs throughout your working life, you may end up with several 401(k) plans all over. The more you have, the more likely it is that you will forget about one or more of them and miss out on that retirement money. Alternatively, if you die, your executor may not be aware of all of the retirement plans you have out there. Consolidating allows you to keep all of the funds in one place under common control.

Risk of Misappropriation

Although all 401(k) plans are administered by a third-party trustee, employers still have some access to the funds. Unscrupulous employers can embezzle from and drain their employees' retirement plans, and it is easier to do so with former employees' plans as they are less likely to keep a close watch on the fund balance. Rolling your old 401(k) into either a new one or an IRA allows you to keep better tabs on the money.

About the Author

Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.

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