Money at 30: Beware the 401(k) "Force Out" What You Need to Know About a 401k Force Out

Money at 30: Beware the 401(k) “Force Out”

One of the benefits of writing about personal finance is that, when I find myself in frustrating financial situations, I at least enjoy the silver lining of getting an article out of it. This is what I had to remind myself of yesterday as I spent a nice chunk of my morning on the phone with Wells Fargo. Why? Well, just as I’m constantly learning about new aspects of personal finance, yesterday I was introduced to the concept of a 401(k) “force out” in the rudest of ways.

My 401(k) Force Out Experience

Logging onto my Wells Fargo account yesterday, I was intending to see if a direct deposit I was expecting had completed. Instead I noticed that my 401(k) — which is the result of a part-time job I left a few years back — had suddenly dropped from north of $500 to $0. To ensure this wasn’t some sort of glitch, I dove into the transaction history only find a distribution had been issued on August 1st.

My first thought was that someone had managed to log into my account and send my money off elsewhere (something that happened to me with my Starbucks Gold Card). However it seemed odd that they would go through the trouble of emptying my dormant 401(k) and not my regular checking account. So after a quick Twitter search to see if anyone else was experiencing such an issue, I decided to call and see what I could learn. (Sidenote: I double checked the number multiple times after getting spooked about entering my social security number into the automated service.)

Once I finally got through to a representative, she broke the bad news to me. Apparently, since my account had remained under $1,000, I had been forced out of my account and a check had been issued to me. Adding to the issue, I learned that the mailing address for my 401(k) account was outdated despite my regular Wells Fargo account bearing the correct info. In other words, they mailed the check to the wrong place. I will say I’m also unsure if this address error meant they did try mailing me warnings about an impending force out as well, but there were no alerts on my online account nor did they e-mail me.

In the end, this part of the mishap may have been for the best as it gave them a reason to stop the previous check and reissue one. As a result (and after some back and forth), I was able to request that the distribution be made as a direct rollover to my — ahem — Wells Fargo IRA. Although it seems that everything will now be resolved, I wanted to take a closer look at what went wrong and how bad it could have been.

What is a 401(k) Force Out?

Following this debacle, I decided to get a better understanding of what exactly had transpired. That’s when I came across a U.S. News article explaining the concept of a 401(k) force out and what your former employer is allowed to do.

According to them, your plan can elect to close your account without your permission if you are no longer active with the company and have less than $5,000 in it. If you have between $1,000 and $5,000 in your account, they may rollover your balance to an IRA of their choosing. Meanwhile, if you have less than $1,000, they can choose to distribute your balance in cash (which is clearly what happened to me).

This could be a major problem for part-time employees who may not be contributing large amounts to their account (I actually think the majority of my balance was profit sharing). Similarly those with multiple jobs and, thus, multiple 401(k)s all sporting smaller balances could also be negatively affected by these rules. That’s because the implications of these force outs could be money down the drain.

Why You Need to Watch Out for Force Outs

On the one hand, getting a check for a few hundred dollars you weren’t expecting may seem like a blessing — until you realize what it actually costs you.

First of all, Wells Fargo charged me a $40 distribution fee as the result of my force out. Next, had the cash distribution remained in effect, federal and state taxes would have been deducted from the amount. In my case, this meant my balance went from a total of $530 to $490 after the distribution fee and down to $380 after taxes.

But wait — there’s more. Not included in the withheld taxes was the 10% early distribution penalty I’d be subjected to since I’m under 59 1/2. When I inquired about whether this was also factored into my distribution, the operator informed me that I’d be responsible for paying this fee come tax time. This would take my net total to less than $350.

Thankfully, by rolling the money over to my IRA, I’ll get to keep the $490 (no getting around the distribution fee, sadly). Moreover this amount will hopefully continue to grow along with my other retirement savings, making it by far a better option than taking my cash out now. After all, even if it is only a few hundred dollars now, who knows how much it could turn into by the time I reach retirement age?

As for those with higher balances but are still under that $5,000 threshold, U.S News also notes that, since plans get to choose what kind of IRA balances may be transferred to, these accounts may include high fees and low returns. Because of this, forced rollover balances tend to actually decrease instead of increase with time. The site even reports that the average $1,000 account transferred to one of these IRAs is likely to decrease by about 25% over 5 years. Clearly this is hardly any better than taking the cash out and paying the penalties.

What You Can to Do Instead

When I left my last job that offered a 401(k) and resulted in that few hundred dollar balance, I decided to keep it where it was because I was happy with the returns I was getting. Knowing what I know now, it probably would have been better to transfer that balance to an IRA (that I selected, not the plan) and skip this hassle. In fact, that’s what I’d now recommend to other workers with low 401(k) balances who are departing their jobs. Also keep in mind that your balance only includes your vested amount, so be sure to take this into consideration when exploring your options.

As for those with more than $5,000 in their accounts, it seems that keeping your money where it is may still be a viable option. That said, it’s probably a good idea to check up on it regularly — and update your contact information — just in case.

In the grand scheme of things, I was quite lucky to have been keeping tabs on my old 401(k) and to take notice when the force out occurred. Had I not been paying attention, it’s likely that I would have let $500 disappear — and then been assessed a $50 penalty on money I never received. Unfortunately I presume most workers aren’t as fortunate as I am and may be letting their earned savings be underutilized at best or completely pilfered at worst. Hopefully my recent experience with the concept of a force out can be a reminder to exiting employees to consider their 401(k) rollover options more carefully.


Kyle Burbank

Head Writer ~ Fioney
Kyle is the head writer for Fioney. He is a personal finance nerd, constantly looking for new apps and services to test and incorporate into his own financial game plan. In addition to his role at Fioney, he's written for other publications including Born2Invest, Lifehack, and Laughing Place, as well as his own site Money@30. He also creates personal finance and travel-related videos for Money@30's YouTube channel, which has garnered more than 2 million views. Currently, Kyle resides in Springfield, Missouri with his wife of 10 years. Together, they enjoy traveling (including visiting Disney Parks around the world), dining, and playing with their dog Rigby.

Other Articles by Kyle Burbank

A Practical Renters Guide From a Lifelong Renter

For those of us who can’t afford to buy a home, just don’t want to buy a home, or who enjoy the freedom to move around as we please, renting can be a great option. According to Census Bureau data, 35% of U.S. households rent — including 61.5% of those living in apartments and 26.7% of those in houses.  This means that, for a huge portion of Americans, renting is...
Varo logo

Varo Bank Introduces "Varo to Anyone" Payment Feature

FinTech-turned-bank Varo has unveiled a new feature that gives customers another option for sending money to friends and family. About the feature: Varo Bank has announced the launch of its new Varo to Anyone feature. As the name implies, this addition will allow users to send money to anyone who has a debit card. This feature replaces Varo to Varo, which was limited to those who already had an account...
Equifax, Experion, and TransUnion logos

Credit Bureaus Make Free Weekly Credit Reports Permanent

The three major credit bureaus in the United States have announced that consumers will be able to access their credit reports for free going forward. What's happening: This week, Equifax, Experian, and TransUnion confirmed that the pandemic-era feature that allows consumers to obtain their credit reports up to one time per week will now be permanent. Originally rolled out in 2020, this capability has since been extended multiple times and...
The "Email" field is empty, you must enter some text to proceed.The text you entered in the "Email" field appears to be invalid, please edit it and try again
Get the Latest News Delivered to Your Inbox

FedEx Announces Winners of 11th Annual 2023 Small Business Grant Contest

Nearly three months after the entry period ended, FedEx has announced the winners of its 11th annual Small Business Grant Content. This year's event saw more than $300,000 in funds going to a variety of small businesses across the nation. Last month, the company revealed 100 finalists, with that list now being narrowed down to just 10 winners. This year's grand prize winners included KindVR, The Cupcake Collection, Up In...
Summer app

Student Loan Benefit FinTech Summer Raises $6 Million

For years, student debt has been one of the most talked about financial topics. What's more, while the debt itself has become a major part of many Americans' lives, discussion of student loans has become political due to efforts to forgive certain loan repayments. However, while we wait for resolution on that front, a FinTech that brings student debt benefit solutions to employers and consumers has raised a new round...
Melissa Urban holding a Ness card

Health and Wellness Rewards Card Ness Partners with Whole30

In recent years, several unique rewards cards have come to market. These include offerings from FinTech startups as well as brands looking to do something special for their loyal fans. On that note, a recently-announced rewards credit card offering is now working with a popular brand to introduce new benefits for customers. This week, the Ness Card (which is issued by The Bank of Missouri) unveiled a new partnership with...
Choice Privileges Select Card

Choice Hotels, Wells Fargo Debut Choice Privileges Select Card

With spring well underway and the summer travel season now just around the corner, Choice Hotels and Wells Fargo have unveiled their latest co-branded credit card offering. Today, the two companies announced the Choice Privileges Select Mastercard. Carrying an annual fee of $95, this card will serve as the premium option in the hotel brand's new lineup. Looking at the Choice Privileges Select, it offers a mix of rewards categories....
H-E-B and Central Market  credit cards

Imprint Launches Credit Cards from H-E-B and Central Market 

The FinTech Imprint is partnering with the popular Texas-based grocery chain H-E-B for a pair of new rewards credit cards. This week saw the launch of the H-E-B Visa Signature Credit Card as well as the Central Market Visa Signature Credit Card. With these two (nearly identical) options, customers will be able to earn rewards on groceries and beyond. First, both versions of the card earn up to 5% back on select...