When you leave an employer, you typically have three choices as to what to do with money in the (now) former employer’s retirement plan. Note that there are actually many many types of employer-based retirement plans (including defined benefits/pensions, annuities, etc) and we are mainly addressing the most common, the 401k plan here.
You may roll the money from your former employer’s 401k into an IRA, usually called a “rollover” IRA — which is really just a regular IRA, but tagged such that it’s clear that the assets in it came from former employer plans rather than from direct contributions.
If you have a new employer, you may be able to — if the new employer’s plan allows it — roll the money from your former employer’s plan into your new employer’s plan. Not all plans allow roll-ins, but most do. (If you have a rollover IRA, you may be able to roll that into your new employer’s plan, too).
Or you may be able to leave the money alone in your former employer’s plan. But you may not.
There are a variety of reasons one might want to leave money in a former employer’s plan, including that 401ks may have access to certain investments you could not access on your own in a retail IRA, additional creditor protection, potential to access the money sooner without penalty, etc. And there are plenty of reasons not to leave money in a former employer’s plan, including limited investment choices, having to deal with the former employer and the custodian of their rather than your own choice, etc.
However, the former employer may also have a preference. There are plenty of reasons an employer may not want to have former employee’s investments tied up with them — they often pay for administrative costs on a per-participant basis, there are additional regulatory requirements as plans get larger, there’s ongoing compliance and other overhead, etc. They’re usually happy to have former employee money there when it’s large balances, as they may get better “volume” pricing for the plan — the more assets the better. But very small former employee accounts are, frankly, a nuisance and liability.
So when can your former employer force you out of the plan?
Generally, if you are no longer employed and an active participant, and your vested balance is < $5000 — and the plan documents specify so — the plan may force you out.
Plans may have a zero threshold for force-outs — meaning they let anyone leave their money there. But the IRS has set a maximum force out threshold of $5000.
If the vested balance is > $1000, the employer must transfer the money to an IRA.
If it’s < $1000, they may transfer it to an IRA — or issue a check (subject to taxes, penalties, etc.).
If the employer/plan cannot get in touch with the former employee, or they get no response from that former employee, they may open an IRA on behalf of the former employee with a trust company which will be held as abandoned money until the owner does a search and tracks it down.
There are some Trust companies out there which specialize in these orphaned balances. When the former employer forces a balance out, but they cannot get information from the former employee as to what to do with it, they can wash their hands of it by opening up an IRA on behalf of that former employee with such a Trust company, send the money there, and they are done. The former employee may find those abandoned bits of money through abandoned property searches. The former employer — and the trust company — certainly are not allowed to keep it!
Before a force-out takes place, the plan sponsor must give at least 30 days advance notice to the participant to give them a chance to make an election re: cash out, rollover, etc.
There are plenty of good reasons for the employee to either leave assets with a former employer — and plenty of good reasons not to. One size definitely does not fit all.
But for the former employer? Unless it’s a very substantial balance, they almost certainly want you out of there, and they can set a threshold as high as $5000 for forced cash outs, but no higher.
So if you have money in a former employer’s retirement plan, unless it’s a fairly small amount, slow down, take a breath, and make an informed decision as to what to do with it. And if it is a small amount — it’s almost certainly better to get ahead of it and take it out on your own terms rather than potentially having it forced out by the former employer at their, rather than your, convenience.