For millions of Americans, the quest for a secure retirement faces an unexpected enemy: their own small-balance retirement accounts. These seemingly insignificant pockets of savings, often tucked away in forgotten corners of past jobs, stand on the precipice of a new threat: involuntary rollovers into Individual Retirement Accounts (IRAs) with potentially detrimental consequences.
Since 2001, these forced account migrations have lurked for accounts between $1,001 and $5,000. But come January 1st, 2024, the Secure 2.0 Act raises the threshold to $7,000, bringing an estimated 800,000 additional low-balance accounts under the involuntary rollover umbrella. This adds to the already 8.1 million such retirement IRAs, raising concerns about their impact on long-term financial security.
Why Are Old 401(k) Retirement Accounts Forced to Change?
The rationale behind these rollovers hinges on administrative convenience for employers. Managing numerous small accounts translates to hefty record-keeping costs. By rolling these accounts into IRAs, they offload this burden. However, the hidden cost falls on the unsuspecting employee.
While seemingly well-intentioned, these IRAs often invest in ultra-safe, low-yield options. Coupled with annual fees that can reach $115, even a $1,000 account risks depletion within 30 years, a harsh reality exposed by a 2014 Government Accountability Office report. For some unfortunate plans, this depletion can occur in as little as nine years.
The younger generation bears the brunt of this vulnerability. A study by the Employee Benefits Research Institute (EBRI) reveals that 66% of government workers whose accounts fall under the new $7,000 threshold are between 20 and 40 years old. This demographic often changes jobs more frequently, further compounding the issue. Pew Research Center data shows that 4.4% of 16-24 year olds switch jobs monthly, compared to just 1.9% of 55-64 year olds. With automatic enrollment in 401(k)s becoming the norm, younger workers face the unwelcome prospect of accumulating a series of tiny, dormant retirement accounts.
What Experts Say About These Changes
“We don’t have the ‘stay with one company for 35 years’ situation anymore,” says Kelly LaVigne, vice president of consumer insights at Allianz Life. “Younger workers are more like self-employed individuals working with various companies. The last thing you want is 20 different retirement accounts.”
Despite their small size, these forgotten accounts hold significant potential, argues Craig Copeland, director of wealth benefits research at EBRI. Over 30 years, depending on investment choices, even a $1,000 account could grow to anywhere between $10,000 and $20,000. “For someone with multiple accounts, this can make a real difference,” he states.
Recognizing the gravity of this issue, two main initiatives aim to tackle the abandoned account problem. Senator Elizabeth Warren’s Retirement Savings Lost and Found Act, now part of the Secure 2.0 Act, empowers the Department of Labor to create a searchable database for lost accounts. Additionally, the Portability Services Network (PSN), a voluntary service launched by major financial institutions, automatically transfers old retirement accounts to new employers’ plans. This system uses Retirement Clearinghouse technology to match Social Security numbers, secure employee consent, and seamlessly move funds.
PSN offers a ray of hope, not only by eliminating forced IRAs but also by preventing the cashing out of accounts below $1,000, a practice riddled with unclaimed checks and administrative headaches. “There’s no size limit,” emphasizes Spencer Williams, CEO of Retirement Clearinghouse. “We take penny balances. Most plans cash out those, leaving sponsors with uncashed checks. The industry is littered with them.”