Rescue Your Old, Low-Balance 401k Before It's Kicked To The Curb In 2024

If you have a dusty, half-forgotten 401(k) from a previous job, there's new pressure to get around to doing something with it -- before your old company does something to it that you don't like. 

Since 2001, 401(k) sponsors have been allowed to automatically boot you out of their plan and into an IRA account if your balance was between $1,001 and $5,000. In 2024, that upper limit is moving to $7,000, exposing an estimated 800,000 more people to involuntary rollovers. 

There are two major downsides. First, to minimize their own liability, employers typically direct that the IRA funds be invested in some form of "safe" cash-equivalent, regardless of what you'd chosen in the 401(k) plan. Over time, that could mean the purchasing power of your account is ravaged by inflation. Second, you can expect the IRA to have steep fees -- some as high as $115 a year. On a $2,500 balance, that would be a 4.6% expense -- before factoring in the expense ratio of whatever fund you're placed into.  

If your old 401(k) balance is under $1,000, the treatment could be even uglier. Employers can just cash you out, exposing you to ordinary income tax on the account balance, plus a 10% penalty if you're under age 59 1/2.  

Things could get even messier if your old employer doesn't have your current address. First, picture them cutting a check that never reaches you. "The industry is littered with these uncashed checks,” Retirement Clearinghouse's Spencer Williams tells the New York Times. Next, imagine them following up with a similarly-misrouted 1099-R you don't even know you're supposed to include in your tax filing. You may first find out you've been cashed out when the IRS sends you a letter asking about a discrepancy on your tax return. 

To avoid an involuntary rollover or forced cash-out, roll your account balance to either an IRA of your choosing, or to another 401(k) plan that accepts rollovers -- maybe the one at your current employer, or a larger one you've kept from a different former employer.

The financial services industry is working to make things easier on job-hopping Americans. The Portability Services Network, a collaboration by which old plan balances are moved into the retirement plan at a worker's new job, went live in November. By the end of 2024, it's supposed to include the six largest 401(k) recordkeepers.

Vanguard, Fidelity and Alight Solutions are already set on their end, and they're now working to plug in plan sponsors. The new, streamlined process will require your consent, but it will helpfully let plan recordkeepers take the lead in nudging you. However, since it's still a work in progress, it's best to take the matter into your own hands before someone else makes unwanted decisions for you.