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Don’t Let 'Dead' 401(k)s Skew Your Retirement Plan

Jason York | E+ | Getty Images

Americans typically work at seven different companies during their career, and most of them have something to show for each stop along the way.

"They end up with these small 401(k)s or other employer-sponsored accounts that they've left behind," said John F. Sweeney, Fidelity Investments' executive vice president.

New research on the contents of Americans' IRAs and 401(k)s suggests that these orphaned retirement plans often languish untouched since the last automatic-deposit contribution, like dusty museums of our financial needs at the time, and out of whack with our current age and attitude toward investing.

The clues come in a study by the Employee Benefit Research Institute, whose researchers looked at Federal Reserve data on the asset allocations of Americans' retirement accounts.

They found that workers who have more than one kind of retirement investment generally keep a higher percentage of their funds in stocks than those who have one kind of account. More specifically, those who own an IRA are more likely to be all in stocks if they have a 401(k) as well.

(Read More: How to Really Make Americans Save for Retirement)

That lack of balance with more stable, interest-bearing assets, like bonds, suggests that these stock-heavy IRAs are predominantly old 401(k)s that were rolled over for safekeeping as workers left a job and never updated.

"There's a lot of odd investing behavior," said Craig Copeland, an EBRI researcher and author of the study, "but that may be the reason. They'll pay attention to the new 401(k), but just leave the older one."

"It's inertia," agreed Rebecca Hall, a wealth planner with Ameriprise Financial in Reston, Va. "They may never have changed from when they were hired 15 years before."

The phenomenon gives "set it and forget it" a whole new meaning.

The problem, as Copeland pointed out in the study, is that our employer-sponsored funds increasingly constitute our chief long-term savings. Investors who rely exclusively on volatile equities may find themselves left short if their retirement coincides with a downturn, as it did for many who retired in the past five years.

"The manner in which participants allocate assets within these plans could have a significant effect upon the financial resources they ultimately will have available in retirement," Copeland wrote in the study.

The easiest way to avoid stacking up 401(k)s is to establish a rollover IRA, a specially designated account that allows you to flip pretax savings out of your old employer's plan and into a new one as you switch jobs.

"We encourage our clients to let that be the conduit for the length of their career," said Hall. Alternately, you can let the money stay in the rollover indefinitely. It only makes sense to roll the funds back out if the new employer's plan is as good or better than your IRA.

You can also use a rollover IRA to consolidate multiple "dead" 401(k)s. The rollover doesn't incur any tax hit, and allows you to invest in any fund offered by your new investment firm. (Be sure to look for a mutual fund company with plenty of low-fee options as the repository for your rollover account.)

With the funds from these old 401(k)s in your hands, you'll also be able to realign your asset allocation to fit your current circumstances. You'll be able to see more clearly what your current allocations are and map your way forward, using the balancing tools many mutual fund companies now provide.

"You want to see them as combined asset base," said Sweeney. "With all of your accounts in one place, you can pull all of your holdings into one analysis."

There can be good reasons to keep your old 401(k) where it is. Your old employer may offer types of investments, like "insurance-wrapped" products, that aren't available elsewhere, or you may simply like the fund you're in. If you are planning to borrow from the 401(k) for college expenses or if you are over 55 and plan on retiring early, your 401(k) may offer more flexibility than an IRA.

(Read More: Saying 'No' to the 401(k))

But there are many more reasons to move the money. "You usually get a larger selection [of investments] that suits your current needs," said Hall, as well as permitting you to invest in a business (including your own) or in real estate. In general, an IRA offers you more control over the money. "With a 401(k), you are a participant, not an owner," Hall said. "In an IRA, you own the dollars."

This difference becomes crucial if the business you're working for goes poof—or you do. "Managing distribution of 401(k)s in case of death can be less than ideal," Hall pointed out. "Some plans will simply cut the survivors a check and let them pay the taxes." A surviving spouse can pull a deceased mate's funds into their own IRA, and surviving children have the option of taking the distributions over time.

If you've racked up half a dozen retirement accounts, the thought of rationalizing them all may appear daunting. But thanks to the Internet, it's never been easier to switch your "dead" 401(k)s from one investment firm to another, though it's usually wise to talk to a representative of both parties by phone. They may even do it for you.

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