Fidelity flags overlooked traps in old 401(k) decisions

Every job change leaves a retirement account behind, and most departing workers never revisit the 401(k) a former employer still holds on their behalf.

Fidelity Investments, one of the largest retirement plan providers in the U.S., outlines four main options for handling an old 401(k), ranging from leaving the balance with a former employer to rolling it into an Individual Retirement Account (IRA).

Each path involves a mix of fees, taxes, and legal trade-offs that many workers may never fully evaluate, Fidelity Investments warned.

Cerulli Associates projects roughly $941 billion in workplace-to-IRA rollovers this year alone, with annual flows expected to reach $1.3 trillion by 2031, CNBC reported.

Why rolling a 401(k) into an IRA can raise annual costs

Rolling a 401(k) into an IRA is one of the most common moves departing workers make, but the transaction often swaps institutional fund shares for pricier retail versions, CNBC reported.

According to the Pew Charitable Trusts, a nonpartisan public policy research organization, workplace plans pool contributions from hundreds or thousands of employees into institutional share classes that charge lower annual expense ratios.

The organization measured the gap across funds offering both share types using 2019 fund data in a June 2022 study and found substantial cost differences.

Median retail equity fund fees ran 0.34 percentage points above institutional equivalents, representing a 37% cost increase, the organization reported.

Only 3% of workers planning an IRA rollover cited lower fees as their most important reason, according to a Pew survey issue brief published in September 2021, meaning fee erosion often runs unchecked across a retirement timeline.

Another Pew study on retirement plan fee literacy found that only 25% of surveyed participants said they had read and understood a disclosure about retirement account fees.

What Fidelity warns happens when a 401(k) is left behind

Leaving money in a former employer’s plan is not a neutral default. The account continues to charge fees while blocking new contributions and most new loans, Fidelity’s guide warned.

Workers with balances under $7,000 face a different risk, as plan rules may trigger a forced distribution or an automatic rollover into a default account.

Capitalize, a rollover platform, estimated in a 2025 report with the Center for Retirement Research at Boston College that 31.9 million accounts sit abandoned nationwide, holding a combined $2.13 trillion.

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Those forgotten balances have grown roughly 30% since mid-2023, and the average abandoned account now holds $66,691, up from $56,616 two years earlier.

A worker who leaves an account untouched could lose more than $500,000 in retirement wealth over decades of compounding under high-fee, poor-allocation conditions, the report estimated.

A Government Accountability Office survey found that 41% of American workers were not aware they pay fees on their 401(k) plans. That awareness gap helps explain why so many accounts sit abandoned without any comparison of plan costs or rollover alternatives.

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How a cash-out or botched rollover drains a 401(k) balance

The most destructive option on the Fidelity guide’s list is pulling the entire balance out before retirement age, which triggers immediate income taxes and a federal penalty.

Workers who withdraw from a 401(k) before age 59½ owe ordinary income taxes on the full distribution plus a 10% early withdrawal penalty, the guide explained.

A $50,000 cash-out at a hypothetical 24% federal rate and 7% state rate, combined with the penalty, would leave roughly $29,500, the firm calculated.

Workers who choose an indirect rollover face another trap, because the plan administrator must withhold 20% for taxes upfront, a common rollover mistake the company has flagged repeatedly.

John Scott, director of the retirement savings project at the Pew Charitable Trusts, told Morningstar that aggressive marketing drives many costly rollover decisions because cost trade-offs are rarely disclosed to departing workers upfront.

Kendall Meade, Certified Financial Planner at SoFi, told InCharge that combining the early-withdrawal penalty with ordinary income tax turns a 401(k) cash-out into an immediate loss of nearly a third of the balance before state taxes even enter the picture.

If you are in the 22% tax bracket and are charged that additional 10% penalty, which would be an automatic 32% cut on your money just for federal taxes

The consequence is that three out of four savers are making one of the largest financial decisions of their career without evaluating the cost variable that compounds most over a 25-year retirement, Pew’s research showed.

What departing workers need to check before moving a 401(k)

Research from John Scott, PhD, director of the retirement savings project at the Pew Charitable Trusts, showed that departing workers who compare fund-level expense ratios before initiating a rollover are far more likely to preserve the cost advantage their workplace plan provided.

Fidelity stressed that the critical check is whether a new account charges more annually for the same investments a workplace plan held at institutional pricing.

Fee gaps, cash-out tax costs, and creditor protections all vary by worker and by plan, the Fidelity guide noted.

Pew’s research indicates that fund-level expense comparisons remain the variable most correlated with long-term rollover outcomes.

Related: Fidelity maps how 401(k) rollovers go wrong

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This story was originally published September 23, 2026 at 5:07 AM.