During their working career people are usually on the search for a better paying, more prestigious job. When they find one, they often enthusiastically quite their old job and move on. One of three things will happen to their 401k.
Leaving a 401k behind at the old employer is not the worst thing the employee could do. The money will still be invested, and it will still be available to them when they realize it is there. But as long as it is managed by the old employer, the plan could change, the advisor overseeing the plan could change, and the fund choices might change. If the employee has left, they have no control over their old plan. Everything is in the hands of the old employer. It is far better to just take it with you.
Roll It Over
If the new plan allows it, the old 401k should be rolled into the new one. This will keep everything tidy and in one place. Since not all plans allow incoming transfers, the next best thing is to roll it into a traditional IRA. In an IRA the individual will have complete access to the money, change investments whenever he or she chooses, and be able to pick which financial advisor (if any) they want to work with. In either scenario, the employee has more control than if they just leave it.
Cash it out
Approximately 49% of people cash out their retirement plan when they switch jobs. Even after quite a few years of accumulating resources for retirement, nearly half will pay the taxes, the 10% penalty, and decimate their retirement so they can take the cash. If they are laid off and have nowhere else to turn for living expenses that is one thing. But much of the time people will cash in their retirement, and buy a new truck, or take the family on vacation. Not only are they wasting money on penalties, they are also setting themselves back years in their retirement savings. For example: An employee who has $50,000 in his 401k cashes it out. He pays $5,000 in early withdrawal penalties, and $12,500 in taxes. He is then left with $32,500 which is spent on a brand new truck, a dream vacation, or something else. Starting from nothing he can then build up his 401k over the next 25 years to just under $400,000 (assuming $5,000 annual additions at 8% interest). If he had left the $50,000 in there, he would have$768,000 after 25 years. Essentially his truck cost him over $350,000.
Saving for retirement does not always mean sacrificing comforts now. But sacrificing retirement in order to splurge now is never a good idea. When leaving a job, make sure to roll your old 401k into the new one. It is easy to do, safe, and better for your peace of mind. This way all the investments will be together, you will get less paperwork, and everything will be easier to manage. Whatever you do, do not take a 401k withdrawal. You end up losing much more than the 10% penalty.
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