Small Balances Swept into Safe Harbor IRAs
Millions of U.S. workers are unintentionally losing out on potential investment gains as their old employers move 401(k) savings into individual retirement accounts (IRAs) parked in cash. These involuntary rollovers, often applied to account balances between $1,000 and $7,000, have become increasingly common following recent law changes. While the practice prevents employees from cashing out their retirement funds, it can limit long-term growth due to low returns and fees.
The Hidden Cost of Job Switching
Switching jobs poses multiple risks to retirement savings. Workers may forget to sign up for a new 401(k), get auto-enrolled at lower contribution rates, or fail to reinvest rolled-over funds from an old plan. Some even cash out accounts, incurring taxes and penalties. Spencer Williams, CEO of Retirement Clearinghouse, warns that balances in these IRAs “often become fossilized” and stop growing, costing workers billions in potential gains.
Case Study: Anni Morita
For 29-year-old environmental analyst Anni Morita from Rochester, New York, the consequences were tangible. After leaving a job in 2021, her 401(k) was rolled into a safe harbor IRA. By late 2022, her balance had decreased slightly due to fees, despite the S&P 500 gaining 24% in 2023. “It feels disrespectful of people’s futures that the balance would decrease over time instead of increase,” Morita said, highlighting the frustrations many workers face with such accounts.
Growth of Safe Harbor IRAs
Safe harbor IRAs were designed to prevent cash-outs during job transitions. However, they can impede wealth accumulation due to low returns. Currently, about 10 million safe harbor IRAs hold approximately $28 billion, with projections to reach $43 billion by 2030. Employers typically transfer accounts to these IRAs to reduce administrative costs for small balances, while balances under $1,000 can be sent as checks.
Options for Workers
Employees can sometimes keep their 401(k) in a former employer’s plan if balances exceed $7,000, potentially benefiting from lower fees and broader investment choices. Some providers, like Vanguard and Retirement Clearinghouse, offer services to consolidate old 401(k) accounts into new plans, helping workers maintain oversight and maximize growth.
The Takeaway
Involuntary rollovers are a well-intentioned mechanism to protect retirement savings, but they can inadvertently hinder long-term wealth building. Workers are advised to carefully track 401(k) balances during job transitions, respond promptly to rollover notices, and consider reinvesting in diversified portfolios to ensure their savings continue to grow.