Report: Poor-Performing Safe Harbor IRAs Threaten $43 Billion in Retirement Savings by 2030
Millions of Americans may be unknowingly jeopardizing their retirement security when they change jobs and leave old 401(k)s behind, according to research released today by PensionBee and the Employee Benefit Research Institute (EBRI).
“The impact these junk accounts can have on ultimate retirement wealth is horrific.”
PensionBee CEO Romi Savova
The new report claims that Safe Harbor IRAs are threatening the long-term outcomes of millions of participants and expose plan sponsors to reputational and fiduciary risk.
Drawing on data from the Employee Benefits Research Institute (EBRI), the findings suggest that retirement savers could have $43 billion trapped in poorly performing retirement accounts by 2030.
Unless auto portability is utilized (see section below), workers who leave behind retirement accounts with values under $7,000 can be forced out of their old employer plans into “Safe Harbor IRAs.” While designed as a temporary solution for small, left-behind 401(k)s, today’s report says the majority of Safe Harbor IRAs become long-term traps that can drain retirement accounts through excessive fees and minimal returns.
“The data provides much-needed numerical clarity on the scale and acceleration of the Safe Harbor IRA problem,” said Romi Savova, CEO of PensionBee. “The likelihood of having at least one of your prior retirement accounts sitting in high-fee, cash-like accounts without your knowledge is strikingly high. The impact these junk accounts can have on ultimate retirement wealth is horrific.”
With the average worker holding 12 jobs over the course of their career, the American workforce is exceptionally dynamic and mobile. Frequent job changes are accelerating the risk: One third of all retirement accounts are currently under the threshold for automatic force-out (<$7,000) if left behind.
Staying invested in a Safe Harbor IRA—intended to preserve capital rather than grow it—leads to lower returns, potentially resulting in a $90,000 differential across multiple accounts over time. PensionBee research finds a $4,500 account left in a safe harbor IRA earning 2% annually (minus $75 yearly fees) would grow to just $5,507 over 45 years. If rolled into a traditional 401(k) earning 5% annually with standard fees, that same $4,500 would grow to $25,856 over 45 years—a $20,000 difference from a single account.
In extreme cases documented in the analysis, smaller accounts left in Safe Harbor IRAs can be completely depleted to $0 through the combination of fees with minimal returns.
A decade-long escalation
The research reveals alarming trends accelerating across the U.S. retirement system:
• Up to 2 million accounts annually are expected to be forced into Safe Harbor IRAs via automatic rollovers. By 2030, an estimated 13 million accounts will sit in Safe Harbor IRAs.
• 25–30% of employment-based accounts are under the $7,000 threshold, leaving them vulnerable to automatic rollover if left behind.
• $28.4 billion is already in Safe Harbor IRAs; by 2030, that figure could exceed $43 billion, a projected increase of more than 50%.
• Just 12.8% of displaced accounts are moved in the first year, and just 25% are moved after three years,suggesting the system isn’t being used as the short-term solution it was intended to be.
To combat the problem, PensionBee partnered with SS&C Technologies to offer an alternative Safe Harbor IRA, designed to reduce administrative costs for employers while providing a good temporary home for former employee retirement savings. PensionBee offers U.S.-based human support to all customers to help transition into a market-leading Target Date portfolio so long-term retirement savings can stay on track. PensionBee offers curated investment portfolios powered by prestigious ETFs like SPY and MDY from State Street Investment Management, one of the world’s largest asset managers.
The new PensionBee white paper outlining the research released today, How Junk IRAs Are Destroying The American Dream, incorporates data from EBRI and PensionBee’s proprietary analysis of market practices and account performance trajectories.
New York-based online retirement provider PensionBee, which specializes in helping people consolidate, manage, and grow retirement savings, manages over $9 billion with approximately 300,000 customers globally.
The auto portability factor
Notably, the PensionBee research does not appear to take into account the emerging trend of automatic transfers of small balances into a new employer plan—auto-portability—which also combats the Safe Harbor IRA problem. The automated process moves a worker’s 401(k) savings from their old employer’s plan into their new employer’s plan when they change jobs, without the worker having to take manual action. This prevents small 401(k) balances from either being cashed out by the worker or languishing in a Safe Harbor IRA, and instead keeps those dollars inside the qualified plan system, preserving long-term tax-deferred growth.
While PensionBee’s findings point to a serious risk for savers whose small balances end up in underperforming safe-harbor IRAs, it likely overstates the long-term losses for workers in plans where auto-portability is implemented or will be implemented. EBRI modeling suggests that, at full adoption, auto-portability could preserve over $2 trillion in retirement savings over a generation.
SEE ALSO:
• PensionBee, SS&C Technologies Launch Safe Harbor IRA
• Firstrade Integrates Capitalize’s 401(k) Rollover API
• Left-Behind 401(k) Assets Hit $2.1 Trillion
• Auto Portability: Meeting the Needs AND Wants of Participants
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
