By Jeff Herman
Most investors believe their biggest financial risks are market crashes, bad stock picks, or retiring too early.
In reality, one of the more costly financial mistakes happens quietly, without drama, and often without anyone noticing until it’s far too late.
It happens when you change jobs.
If you’re participating in a 401(k) and you switch employers, once your balance is vested, you typically have four options:
- Leave the money in your former employer’s plan
- Roll it into an individual retirement account (IRA)
- Roll it into your new employer’s 401(k)
- Cash out the account
One of the biggest and most damaging mistakes investors make is choosing the last option.
A 2023 study found that 41% of U.S. workers withdraw money from their 401(k) when they leave a job, often cashing out the entire account instead of rolling it into another retirement plan. Taxes and early-withdrawal penalties aside, this decision permanently interrupts compounding and can erase years of disciplined saving.
But cashing out isn’t the only problem.
The Forgotten Account Problem
When people switch employers, their attention is understandably elsewhere: a new role, new income, new benefits, new routines, and sometimes a new city. Retirement accounts rarely make the priority list. As a result, company-sponsored 401(k) plans are often left behind.
According to industry research from Capitalize, there are now more than 31.9 million forgotten or left-behind 401(k) accounts in the U.S., holding roughly $1.65 trillion in assets. That’s nearly double the number of unclaimed accounts estimated just a decade earlier.
One common misconception fuels this trend: “I thought my 401(k) automatically moved to my new employer.”
It doesn’t.
401(k) plans do not automatically follow employees to their new employer. And because deciding what to do with an old plan, while weighing tax rules, rollover mechanics, and investment choices, can feel overwhelming, many workers delay the decision. Over time, those accounts become harder to track, easier to forget, and more likely to be mismanaged.
The Hidden Cost of “Cash Drag”
Another costly mistake often occurs even when investors take action.
When a workplace 401(k) is rolled into an IRA, the funds are often deposited into a cash or cash-equivalent holding by default. Unless the investor actively reinvests those assets, the money may sit idle for months or even years.
Why does this happen? Assumptions.
Many investors assume their IRA, 401(k), or Roth account is automatically invested. In reality, no one presses that button for you, and that’s a big reason I’m an advocate for making this a great time to speak with your financial advisor about your future.
A 2024 Vanguard survey found that nearly half of investors rolling their 401(k) into an IRA mistakenly believed their assets would be automatically invested, and about 46% did not realize their rollover went into a money market or cash-equivalent by default.
The study found that many assumed the IRA would “work like their 401(k)” and invest automatically, but instead their money sat in cash, missing out on market returns until they took action.
Years later, investors are surprised to learn that a meaningful portion of their retirement savings was spent out of the market, disconnected from any long-term strategy.
Not because they were careless. Because they assumed someone else was handling it.
Why Is This Mistake So Common?
For many investors, even high earners, retirement accounts are their largest financial asset outside their home, yet they’re often the least reviewed. For those who have had multiple moves throughout their careers, these accounts may span multiple employers, sit with different custodians, and be governed by rules that change over time.
And unlike your paycheck or checking account, they don’t demand your attention.
If accounts are left scattered across former employers, it becomes difficult to track investment allocations, performance, and fees. While long-term investing doesn’t require constant trading, it does require periodic monitoring and rebalancing.
According to Capitalize, forgotten or mismanaged 401(k) accounts could cost an individual more than $500,000 in foregone retirement savings over a career in a worst-case scenario, not because of poor markets, but because of inattention.
How We Fix It
If you’re planning to leave your current employer, the time to think about your retirement plan is before your last day.
Review the materials provided by your plan administrator. Some employers offer direct rollover options that simplify the process. While cashing out may seem convenient, distributions are taxable and often subject to a 10% early-withdrawal penalty, making it one of the most expensive “easy” decisions you can make.
If you believe you may have forgotten an old plan, or if you’re juggling multiple accounts from prior employers, it may be worth working with a financial advisor or a specialized firm to locate and consolidate those assets.
Not to chase returns.
But to make sure the money you worked so hard to save is actually working for you.
CLICK HERE TO SCHEDULE A CONVERSATION WITH JEFF AND REVIEW HOW YOUR RETIREMENT ACCOUNT IS ALLOCATED.