Changed Jobs? Don’t Leave Money Behind

photo: ShellyS

If you’ve spent your entire adult life working for the same employer and you have no plans to change jobs before you retire, you can skip this article. (Try this one instead.)

Everybody else, though, should ponder this: When you left your old job (or jobs), whether because of a recent layoff or a long-ago career change, did you leave money behind?

If so, you might want to go get it. Because even if it’s not a lot of money, leaving it where it is could be a huge mistake.

Um, I’m pretty sure I cleaned out my desk.

I don’t mean, “Did you leave $30 in change in the back of your desk drawer?” I’m talking about your old 401(k). Do you still have a balance in your old employer’s retirement plan?

You might not think of that as leaving money behind, exactly — after all, they probably still send you statements, and maybe you figure you can just leave it there and deal with it after you retire.

And actually, you can. As long as the company doesn’t go out of business (in which case you’d get a check in the mail), you can leave a balance in your former employer’s plans for years, even decades if you like.

Of course, you’ll pay for the privilege — in more ways than one.

How those old 401(k) balances are costing you

It isn’t just the high annual fees you may be paying the plan’s mutual fund managers or outside advisors — 1%, 2%, sometimes even more — though those are bad enough.

It’s the opportunity cost.

See, when you’re in a 401(k) plan, your investment options are limited — typically, you can choose from maybe two dozen mutual funds, of which maybe four or five are actually appealing.

But if you took your money out of that old plan and rolled it into a rollover IRA at a discount brokerage firm like Charles Schwab or Fidelity — a move that would cost you nothing except a few minutes for some paperwork and maybe a toll-free phone call — you could invest it in almost anything.

Including stocks.

Why buying stocks is better

Sure, buying stocks is arguably riskier than just dumping your money into an index fund. And yes, keeping that risk under control requires that you take an active hand in your own future, doing research and keeping an eye on the companies you own.

But the payoffs can be enormous. Consider: If you had put $7,000 into a good index fund 10 years ago — say, Vanguard 500 Index Fund: a popular 401(k) choice — you’d have about $6,570 to show for your efforts now. And that’s with a low-fee fund from a great manager!

On the other hand, what if you had taken that money and bought a fairly mainstream portfolio of stocks? Think about what would have been a good large-cap portfolio 10 years ago: Caterpillar was riding the emerging-world construction boom, Steve Jobs had been back at the helm of Apple for a couple of years, and the U.S. government’s attention on tobacco had driven Altria‘s stock price way down.

So let’s pretend we bought those stocks, along with a few dividend-paying blue-chip perennials, and add a then-obscure small-cap ringer — Hansen Natural. How’d we do?

(Source: Yahoo! Finance, Motley Fool. Hypothetical investment is from market close on March 16, 2000, through market close on March 15, 2010, and includes splits and reinvestment of dividends.)

We did pretty well, wouldn’t you say? Sure, Hansen Natural is a ringer — 80-baggers don’t exactly come along every day — but even if we leave it out and assume that whatever that $1,000 was invested in went to zero, we still have almost $31,000 to show for our $7,000 initial investment. In other words, we thoroughly trounced the poor Vanguard fund. And that’s with a pretty conservative big-name portfolio, and one investment that we’re hypothetically wiping out!

And actually, I included Hansen Natural in that example to make an important point: The biggest returns are often found in the stocks that are too small for mutual funds to buy, as Hansen was 10 years ago. You might not find an 80-bagger very often, but a few 5- or 6-baggers every now and then is a reasonable goal — and the effect those will have on your overall portfolio performance is dramatic.

The upshot

If you’ve been laid off in the last year or two, rolling over your old 401(k) balance probably hasn’t been your highest priority. But now’s the time to make that rollover happen. Remember: The sooner you deal with it, the sooner you can start enjoying market-trouncing returns — the kind that can fund a truly excellent retirement.

This article was originally published as This Wealth-Building Move is a Must on Fool.com