A 401(k) plan is supposed to grow exponentially in value over time, through the miracle of compounding. That growth is key to the promise of funding a comfortable retirement.
But if you leave a job, and you leave behind a four-figure 401(k) account, that growth may never come.
Billions of dollars sit in “automatic rollover” Individual Retirement Accounts, created when a worker leaves, and the employer removes their 401(k) from its workplace retirement plan.
A typical 401(k) account multiplies in value over the years as the stock market rises. But an automatic rollover IRA does not: Typically, the money winds up in a cash-equivalent account, where it might earn 1% or 2% interest per year. Administrative fees chip away at the account’s value.
A new white paper released Oct. 21 by the retirement savings provider PensionBee shows what happens to those accounts over time: Nothing good.
After one year, the study finds, 68% of automatic rollover IRAs have declined in value. After eight years, 39% of the accounts are still worth less than when they were created.
“Millions of Americans have small 401(k)s sitting with old employers, and most have no idea that money can be moved into an account that slowly drains their savings,” said Romi Savova, CEO of PensionBee.
401(k) Accounts Are Supposed to Grow, Not Shrink
A retirement account of diminishing value runs counter to the design of the 401(k) system: The idea is for American workers to build retirement nest eggs over decades of compounded value by investing in the stock and bond markets, not to let the money languish in a low-interest money market account.
“You want this money to grow and be invested in a way that you can take advantage of these returns,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. The PensionBee report drew on EBRI account data.
Automatic rollovers are becoming more common, with the gradual expansion of tax-advantaged retirement accounts and the rise of automated enrollment for new workers.
The number of automatic rollovers is projected to double from 1.1 million per year in 2022 to 2.2 million annually in 2030, according to research by PensionBee and EBRI. By then, 13 million accounts holding $43 billion in retirement assets could sit in IRA purgatory.
Congress created “Safe Harbor IRAs” in 2001 as a way for employers to preserve retirement funds for departed workers. That was a good thing, if the alternative was closing the account and cutting a check to the former worker, triggering taxes and penalties.
The law applied to balances under $5,000, a threshold later raised to $7,000. Employers could create rollover accounts without a worker’s consent but had to keep the funds in a cash-equivalent investment – in theory, to preserve value.
Safe Harbor IRAs were meant to be temporary. But half of all rollover IRAs are still open eight years later, PensionBee found. Workers lose track of the accounts, or forget they ever existed.
Over time, automatic rollover IRAs often lose value through a combination of low interest rates and administrative fees. The account provider might charge a $100 one-time fee to open the account, and a $5 charge for monthly maintenance into perpetuity. The fees eat away at the account’s value, especially when the starting balance is low.
“Dollar-based fees of $30 or $50 per year, that can be really toxic on a small account,” Savova said. “There’s no way for the return on that account to outgrow the fee.”
More Than $2 Trillion Sits in Forgotten or Left-Behind Retirement Accounts
Automatic rollovers are part of a bigger problem: More than $2 trillion, by industry estimates, sits in forgotten or left-behind retirement accounts.
When you leave a job and have a 401(k), you have a few options. You can do a rollover yourself, transferring the funds to another 401(k) or IRA. You can cash out, potentially triggering taxes and penalties. Or you can do nothing.
If you do nothing, and the 401(k) holds $7,000 or less, there’s a good chance your employer will do an automatic rollover.
Those low-interest accounts tend to belong to younger workers, often under age 45, who tend to change jobs and addresses more frequently. With a job change and a move, it’s easy to imagine how a retirement account might get lost in the shuffle.
“Maybe you were auto-enrolled in a 401(k), so maybe you weren’t paying attention to begin with,” said Kate Ashford, lead wealth writer at the personal finance site NerdWallet. “You’re changing jobs. There’s a lot going on. It’s not on your priority list, and the longer you wait, the lower it goes on your priority list, so it just sits there.”
Do You Have Money in an Automatic Rollover IRA?
You might have money in an automatic rollover IRA, PensionBee advises, if any of these statements apply to you:
- You left a job in the last several years and didn’t claim your 401(k).
- The balance in your account was less than $7,000.
- You’ve moved or changed email addresses since then.
- You’ve received mail from an unfamiliar IRA provider.
If you think you have lost track of an old 401(k), here are some places to look:
- The National Registry of Unclaimed Retirement Benefits. Enter your Social Security Number, run a quick search, and see if any idle accounts turn up.
- The Retirement Savings Lost and Found Database. This is a relatively new site, launched by the Department of Labor to help workers locate unclaimed benefits.
- Missing Money. This is a clearinghouse of unclaimed property held by U.S. states and Canadian provinces.
Reporting by Daniel de Visé, USA TODAY / USA TODAY
USA TODAY Network via Reuters Connect
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