The Benefits (And Potential Cons) Of Consolidating 401(k)s And IRAs


The job market in recent years has been unlike anything we’ve seen in the past. The response to the pandemic changed how we work and where we work, and the ongoing effects are showing up in the data.

According to Zippia, 37% of the U.S. labor force changed or lost their job in 2020, the average tenure with a single employer is just 4.1 years, and 65% of American workers are actively searching for a new full-time job right now.

Clearly our generation doesn’t stick with one employer for life and retire with a pension the way our parents and grandparents might have.

If you have changed jobs multiple times over the course of your career, that probably means you have retirement savings with more than one bank or investment firm. But if you have multiple 401(k)s and IRAs scattered throughout your employment history, there’s a surprising reason you should be consolidating—you could be leaving money behind.

According to the Government Accountability Office—which analyzed data between 2004 and 2013—approximately 25 million Americans left behind money in a 401(k) account after leaving a job. That equates to roughly 37% of all workers actively saving in an investment plan through their workplace, according to figures from the labor department.

More and more employers are automatically enrolling their workers in 401(k) plans. Some may not even realize they’ve been enrolled. This increases the likelihood of employees forgetting about a retirement account when they change jobs.

RELATED: Where Do You Stand? The Average Retirement Savings By Age

If you don’t leave updated contact information with your former employer, you probably aren’t going to receive any updates or information about that retirement plan or your account. What’s more, current law allows businesses to move old accounts with a balance under $5,000 out of their plan, making it even easier to lose track of your money.

“From a consumer perspective, the default should be 100% of the time to move your money [when changing jobs],” Spencer Williams, president and CEO of Retirement Clearinghouse, told CNBC.

The Benefits Of Consolidating Accounts

There are numerous benefits to consolidating your retirement accounts, but here are a few of the most notable.

1. It’s Easier To Keep Track Of Your Money

Attempting to keep track of multiple accounts attached to a variety of former employers is a waste of time and effort. When you consolidate everything into one account, it’s easier to track your progress toward your savings and investment goals and manage your options. Having one statement, one account number, and one password is optimal for not allowing anything to slip through the cracks.

2. Fewer Fees

Retirement plans usually incur investment, custodial, and administrative charges. Therefore, fewer accounts should mean fewer fees—which could mean much better growth for your money.

Some fees are even based on the amount of assets you hold. If you combine your accounts, that total balance might meet minimum asset thresholds, which could qualify you for a fee reduction

3. It Makes Things Simpler For Your Beneficiaries

Retirement accounts are often left behind when you die, and having multiple accounts could make things difficult for your loved ones who administer your estate. Consolidating accounts should make it easier to coordinate payments for your heirs, without the hassle of tracking down multiple statements and contacting multiple custodians.

4. Reduce The Risk Of Missing Required Minimum Distributions

The IRS requires you to take a minimum distribution from your retirement accounts—known as an RMD—when you turn 72. If you don’t, there is a heavy penalty equal to 50% of the amount you don’t withdraw. Having multiple accounts makes for multiple RMDs and increases the risk of making a costly mistake.

RELATED: The Truth About Needing A 401(k) To Successfully Retire

The Potential Cons Of Consolidating Accounts

Consolidating retirement accounts might not be the best option for everyone. It may limit your investment options and your flexibility. Rolling your money over to another investment could also incur fees.

Cutting down to just one account might not be the right move for your investment goals, either. Depending on the amount and frequency of your contributions, it might be best to have at least one 401(k) and one IRA.

The Best Thing To Do For Your Retirement

Finances are intensely personal, as we all have different needs and goals. The best thing to do when planning for your retirement is to make a monthly budget and talk with your family/partner. It’s also a good idea to consult a professional so you can be informed of your different investment options and receive guidance when weighing your choices.

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