Workers who switch jobs several times in the course of their career could find themselves with a half dozen old 401(k)s scattered here and there from past jobs.
The typical American will change jobs at least six times, according to a 2012 report by the Bureau of Labor Statistics, which found the median number of years that wage and salary employees had worked in their current jobs was 4.6 years.
Whether moving on to a better job or becoming a victim of corporate restructuring, workers often have other things to think about when leaving. And when former employees choose to simply leave their retirement fund with the old employer, it becomes what is known as an orphan 401(k).
As of 2010, there were 15 million orphaned 401(k) accounts in the U.S., representing more than $1 trillion in investment dollars, according to ING, a global financial institution.
ING reported 50 percent of workers who participated in a 401(k) plan left their "orphaned" account at a previous employer. Nearly a quarter of those who reported orphaning a 401(k) left between $10,000 and $50,000 in the accounts. An additional 11 percent claim to have no idea how much money was left in those accounts.
Robert Hapanowicz, president of Hapanowicz & Associates, a financial services firm in Pittsburgh, has a client who retired at age 62 and had five orphan 401(k)s from past employers.
"He admittedly said he had not paid attention to any of the accounts," Hapanowicz said. "The problem we find is people are so caught up in everyday life, taking care of their families, working at their jobs and being active in the community, it becomes a neglect story."
"Investment accounts are not set-it-and-forget-it," he said. "They need attention. The allocation needs to be checked and tuned up and optimized on a quarterly or semi-annual basis. But life is busy. If it's out of sight, it's out of mind."
Workers who leave a job have four options. They can roll their 401(k) money into a new one offered by their new employer. They could roll the money into an individual retirement account outside of the workplace. They could cash out the 401(k) and pay the associated taxes; or they could do nothing and leave the account with their former employer.
Younger workers might be more vulnerable to this than veteran employees because they tend to change jobs more frequently. The Labor Department found the average 25-year-old has already worked 6.3 jobs.
While cashing out a 401(k) is an option, workers who are younger than 591/2 must pay taxes on the withdrawal, plus a 10 percent penalty.
Chris Battistone, a vice president at PNC Investments in Pittsburgh, said when people have 401(k)s spread over different employers, it is difficult to manage retirement plans that are subject to different rules and investment options within each plan.
"People unfortunately don't pay enough attention to their retirement, in general," Battistone said. "There's a high percentage of people who make an initial investment and never change it. In a worse case scenario, the investments in an orphan 401(k) are improperly allocated."
Conventional wisdom suggests that younger workers invest more heavily in stocks and shift the weight as they age. A neglected 401(k) could expose older people to the risk of a stock market downturn at a time in their lives when they can't afford to lose money.
Of course, consolidating 401(k) funds isn't always the right answer for everyone. While it might be easier to manage retirement funds in one fund, Battistone pointed out sometimes leaving a fund with a former employer could be a valid choice.
"You have to evaluate your specific needs, but that plan may be attractive enough to leave your money there," he said. "Some of the reasons you may want to leave it with a past employer include no withdrawal penalties or immediate income tax obligation and the consistency with investment choices remaining the same."
On the other hand, Battistone said, that strategy may leave investors with limited investment options in a plan. "Plus, you cannot make additional contributions to that plan and you may have limited access to your money."