San Diego Union-Tribune (Sunday)
Out of sight, out of money
Involuntary 401(k) rollovers can hurt forgotten funds
As a Comerica Bank executive with more than 35 years of experience in wealth management, Lisa Featherngill knows how to handle retirement money. But when she left her previous position at Wells Fargo two years ago, she had to figure out what to do with her old 401(k) — and was as f lummoxed as any other person changing jobs.
“A lot of times, people don’t know where they’re going to work or if they’re eligible for the 401(k) plan at the new job,” Featherngill said. “I just didn’t want to think about it, so I left my plan behind.”
As of June, job changers had left behind nearly 30 million 401(k)s or similar retirement accounts worth an estimated $1.65 trillion, according to Capitalize, a technology company that offers an online platform to help transfer 401(k) accounts. But in the aftermath of the pandemic “great resignation,” people who have left small 401(k)s with their former employer can find those accounts seriously diminished — or even completely drained — when plan sponsors roll that money over to individual retirement accounts with high fees and low-yielding investments.
Since 2001, this kind of transfer could happen to any 401(k) or similar workplace account with a balance between $1,001 and $5,000. But starting Jan. 1, provisions in the Secure 2.0 retirement act will raise the balance for an automatic rollover to $7,000 — an adjustment that will expose an estimated 800,000 additional workers with lowbalance accounts to involuntary rollovers. About 8.1 million of these forced IRAS already exist.
“When the rollover limit goes to $7,000, it’s going to be somewhere north of $1.5 trillion that are being frittered away by this inefficient system,” said Spencer Williams, CEO of Retirement Clearinghouse, a firm that helps transfer old 401(k)s to workers’ new plans.
The law governing retirement accounts allows the sponsoring employers to have the plan administrators move inactive, smallbalance 401(k)s and similar defined contribution accounts out of their plans to escape the cost of record keeping and sending notifications to ex-employees, who may not have left a forwarding address.
However, the fiduciary responsibility to prudently handle the money remains with the employer. To play it safe, the money is rolled into IRAS and invested in lowyielding money-market vehicles, certificates of deposit or other cash equivalents. While that’s done with good intentions, there is a hitch:
The low returns of those new ultrasafe IRAS don’t generate enough cash to offset fees of as much as $115 per year, which could deplete a worker’s $1,000 account balance within 30 years in some cases but in as little as nine years in one plan, a 2014 report from the Government Accountability Office found.
For accounts with less than $1,000, the employer can simply cash out the account and send the former employee a check, which triggers income taxes and a 10 percent early-withdrawal penalty for anyone younger than 59 The same taxes and penalties also hit more than half of all job changers who choose to cash out lowbalance 401(k)s on their own.
Losses caused by involuntary rollovers are more likely to hurt younger employees. Of 3 million accounts held by state, county and other government workers, 66 percent of those workers whose accounts fall under the new $1,001 to $7,000 limit are between the ages of 20 and 40, according to an analysis by the Employee Benefits Research Institute, or EBRI, a public policy research organization.
Younger workers also change jobs more frequently, with 4.4 percent of workers between 16 and 24 years old changing jobs in a typical month during 2022, compared with just 1.9 percent of workers between 55 and 64 making a move, according to the Pew Research Center. With more employees being automatically enrolled in 401(k) plans when they start a new job, these workers can easily find themselves with more than one small-balance retirement account from a former job.
“We don’t have the situation where you stay with the same company for 35 years,” said Kelly Lavigne, vice president for consumer insights at Allianz Life, an insurance company. “You’re more like a self-employed person working with a bunch of different companies. And the last thing you want, if you’re changing jobs on a regular basis, is to end up with 20 different retirement accounts.”
Despite the low balances, these forgotten retirement accounts can generate significant returns during a younger person’s working years, said Craig Copeland, director of wealth benefits research at the EBRI.
Depending on the size of the balance of a small 401(k) and how it was invested, the account could be worth anywhere from $1,000 to $20,000 or more after 30 years, Copeland said.
“If there are a number of accounts, there is a real possibility to make a significant difference for the participant,” he said.
There are two efforts to fix the problem of abandoned 401(k)s and similar accounts. The Retirement Savings Lost and Found Act, proposed by Sen. Elizabeth Warren, D-mass., was wrapped into the Secure 2.0 Act. It charges the Department of Labor with creating a database that workers can use to track down a forgotten account. The department was allotted funds to create the system by next December.
And in November, the financial services industry established a system that automatically moves old retirement accounts into the plan of the worker’s new employer. The Portability Services Network automatically matches Social Security numbers on workplace accounts, obtains the worker’s consent to move the money, and automatically deposits money from the old account into the new employer’s plan. Employees can check for missing accounts on the network’s website by using their last name and last four digits of their Social Security number.
The voluntary network includes Alight Solutions, Empower, Fidelity Investments, Principal, TIAA and Vanguard and uses technology from Retirement Clearinghouse. These financial services firms administer and hold the records for employer plans and are expected to encourage the employers sponsoring their plans to participate. Besides helping savers avoid forced IRAS, the network would eliminate cashing out accounts with balances of $1,000 or less, Williams of Retirement Clearinghouse said.
“There’s no size limit” on the accounts that can be automatically moved, he said. “We’ll take balances down to a penny. Most of these plans are cashing out balances of less than $1,000, and the sponsor is left with a huge uncashed-check problem. The industry is littered with these uncashed checks.”
Handling Your Old 401(k)
Workers are free to move their old accounts without a network or federal database, and have several options. The goal, financial planners say, is to keep most or all of the money together, where the investments can be coordinated and the performance easily monitored. Here are points to know.
• If a new employer has a 401(k) or similar plan, that plan’s administrator can typically handle combining your accounts. This would allow you to take a loan against the account balance, if that option is offered.
Loans can be taken only from your current employer plan.
• If a new employer doesn’t offer its own plan or you have stopped working, your old plan can be rolled into an IRA, a transfer most financial services providers can handle.
• If your plan balance totals more than $7,000, the money can be left in the former employer’s plan. Account holders should register online to get statements and to manage their investments.
• Workers with a balance of less than $1,000 will most likely find themselves cashed out of their old plan. To avoid paying taxes and potential early-withdrawal penalties, deposit that money into an IRA within 60 days. The deposit must cover the entire 401(k) balance withdrawn, including any money withheld for taxes. (That money can be reclaimed on the account holder’s next tax return.)
“If the balance is less than $1,000, my advice is don’t let it cash out; you can roll it over,” said Jeanne Fisher Sutton, a certified financial planner in Nashville, Tenn., known as 401(k) Lady on Youtube. “Many, many people are losing track of their 401(k)s, and it’s so hard to find. If you’re leaving an employer, roll it over and be proactive about your account management.”
Featherngill, the Comerica Bank executive, transferred her old 401(k) from Wells Fargo two years after she left.
“I just rolled it over last month,” she said. “It took me that long to figure out what I wanted to do. It’s easy to leave it there. It’s the default for most people.”