Financial Woes for Job Changers’ 401(k)s

By Anne Tergesen, Wall Street Journal

Every year, millions of people leave their jobs—and fail to tell their former employers what to do with their 401(k) accounts.

Enter the forced rollover, also known as a “forced transfer.” The tax code allows 401(k) plans to weed out accounts belonging to former employees with balances of $5,000 or less, and transfer the money into an individual retirement account.

Those rollovers are almost always a financial disaster for the account holder, according to a new report from the Government Accountability Office.

Why? Under Labor Department regulations, these transfers must be invested conservatively—such as in certificates of deposit or money-market funds—or the employers who transfer the money may be held liable. The problem: Low risk equals low returns—and those returns frequently turn negative when fees are deducted from the accounts.

The GAO recommends that regulators change the rules on investing the money in these accounts, perhaps by allowing the use of target-date funds, which have become the default investments for many 401(k) plans. Target-date funds invest in a mix of stocks and bonds that grows more conservative over time.

For 401(k) participants, the message is clear: Don’t leave small balances behind.

And if you have experienced a forced transfer, quickly initiate another rollover—this time, into an IRA of your choice with an appropriate investment.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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