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One of the benefits of a 401(k) account is allowing the power of time and compounding to create a sizable retirement nest egg. Simply investing in an S&P 500 index fund can generate substantial returns. The stock market has grown at an average 10.2% annually for over a century, and though it's never a straight line higher, you can mimic the performance of the market and match those returns.
This was brought to mind by a Redditor's post on the r/personalfinance subreddit about his sister's 401(k) that has lain dormant for 15 years since her death. He wants to know how the family can access the account.
24/7 Wall St. Highlights:
Using a 401(k) is an excellent tool to save for retirement as the magic of time and compounding can have it grow into a substantial nest egg over time, even if additional funds aren't contributed to it.
Equally essential is to ensure proper documentation on beneficiaries and estate administration in the event of an untimely death.
Also: Is your 401(k) optimized for your retirement plans? (Sponsored)
The circumstances
In 2009, the sister of a Reddit user passed away, leaving behind a sum of $25,000. Although she had recently tied the knot before her death, her husband chose to forfeit any claim to the funds and later relocated abroad.
Recently, the administrator of the 401(k) plan reached out to the Redditor's elderly father, who is in his 80s, informing him that he is the designated beneficiary of the account. Although the administrator mentioned that only a death certificate is needed, the father has been feeling confused lately and tends to become emotional over specific matters.
The family aims to ensure they can access the account before discussing the issue with him, and they are also considering whether it would be valuable from a financial perspective after such a long period.
The significance of having a well-defined beneficiary
I want to clarify that I'm not a financial advisor, so these are merely my thoughts. Generally speaking, according to ERISA (Employee Retirement Income Security Act) regulations, a spouse is considered the default beneficiary unless they formally relinquish that right in writing. In the case of the Redditor's sister's husband being the primary beneficiary, he would have had to specifically decline the inheritance for the assets to be transferred to another beneficiary, such as the Redditor's father.
Given that the spouse stated he wanted nothing to do with it, there is a possibility he might have disclaimed it to the plan administrator, which would explain why the father is now being contacted, or they may have been unable to locate him.
In the absence of a designated contingent beneficiary (or if the plan's documentation specified otherwise), the funds could potentially return to the estate of the sister.
The administrator's outreach indicates that either the father was designated as a secondary beneficiary, or he may have received it automatically through the estate.
Estimated account worth
As previously stated, the value of a 401(k) account can vary significantly based on the investment choices made; it may have considerable worth or could be nearly worthless.
By investing in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), which was created in 1993, the account could have grown considerably over the past 15 years. It would be worth approximately $222,500 with dividends reinvested today, a 15.7% CAGR.
Despite facing countless corrections, crashes, and bear markets, along with recessions and depressions, the following bull markets have erased all traces of these downturns, propelling the market to reach new peaks. However, it is uncommon for it to recover precisely the same percentage.
However, if individual stocks were bought rather than an index fund, anything is possible. Owning video rental chain Blockbuster, for example, or Sears Holding, would have the account be worth nothing. Shares of Walmart (NYSE:WMT), though, could still hold substantial value as the $25,000 would have turned into $172,660, including dividends. Nvidia (NASDAQ:NVDA) would be worth over $20 million.
The fees associated with the plan can potentially diminish the overall value of the account.
Upcoming actions
It's crucial to get in touch with the 401(k) administrator. By providing the sister's death certificate, you can get the exact details on the account's current value, any fees charged since 2009, and the beneficiary status.
Additionally, make sure to gather any required documents such as a marriage certificate (to verify marital status) and any correspondence in which the spouse renounced the inheritance.
No matter the worth of the account, it's important to complete the process. Even if the 401(k) has significantly lost value, it may help the father find closure and potentially serve as a cherished memory of his daughter.
