Employees who leave behind 401(k)s with old employers could miss out on as much as $90,000 by the time they retire, according to a new report from PensionBee.
“Safe Harbor IRAs represent a critical blind spot in America’s retirement system.”
PensionBee CEO Romi Savova
When employees leave behind balances of $7,000 or less, employers can move those funds into Safe Harbor IRAs without the employee’s consent. This helps employers manage high volumes of inactive accounts, but it could mean many Americans are missing out on returns.
“Safe Harbor IRAs represent a critical blind spot in America’s retirement system,” said Romi Savova, CEO of PensionBee, in a statement. “The lack of transparency in these accounts is particularly troubling, as most assume that the money they put towards their retirement will remain theirs. The difference between investment defaults matters enormously.”
Safe Harbor IRAs are designed to preserve capital, not grow it. They’re required to use low-risk investments, which often provide growth well below the rate of inflation. Some can use bank deposits with interest rates as low as 0.5%, for example.
Those returns can be negated by high fees. While 401(k) plans have an average fee of 0.85%, Safe Harbor IRAs charge monthly fees that can add up. PensionBee says one provider charges $5.67 monthly plus 0.5% annually. For an account with $3,500, that’s $85.54 yearly, or 2.4%. These fees can exceed the account’s modest earnings and deplete its principal.
Safe Harbor IRAs can also participate in “interest skimming,” offering less than 1% interest to account holders when prevailing rates exceed 4%. The provider takes the excess as a “bank servicing fee.”
For Americans who leave behind several accounts in their early career, those missed returns and high fees can add up. And according to estimates from the Department of Labor, there are over 29 million forgotten 401(k) accounts in the U.S.
PensionBee calculated that if a 20-year-old worker leaves behind a $4,500 retirement account, they would see it grow to just $5,507 if it’s left in a Safe Harbor IRA until retirement. If the same amount had been rolled over to a traditional 401(k) with a 5% return, it would be worth $25,856 by retirement.
The losses grow if there are multiple job changes. If someone switches jobs every two years in their 20s and remembers to roll over their accounts each time, they’ll save $90,000 more by retirement than someone who leaves their accounts behind in a Safe Harbor IRAs.
Gen Z might be most impacted by losses associated with left-behind accounts, as they tend to switch jobs more often. According to the Bureau of Labor Statistics, the median tenure of workers ages 25 to 34 is 2.7 years, compared to 9.6 years for workers ages 55 to 64.
They’re also starting retirement accounts at an earlier age than previous generations. The average Gen Z employee starts saving for retirement at 22, compared to 27 for Millennials, 31 for Gen X and 37 for Boomers, according to a study from Northwestern Mutual.
Savers can help avoid losses associated with Safe Harbor IRAs by rolling over their old 401(k)s within 30 days of leaving their job, PensionBee said.
SEE ALSO:
• Participant Loses $114,000 in 401(k) Rollover to Fraudster Intercepting Paper Checks
• 401(k) Rollover Delays Could Cost Nearly $76k in Lost Savings
• Outdated 401(k) Rollover Processes Challenge, Frustrate Retirement Savers
Corey Dahl is assistant editor with PropertyCasualty360.com. Previously, Corey was the editor of Colorado Builder magazine andS enior Manager of Content Strategy & Development at Charles Schwab.