A new report highlights that millions of Americans often forget about their 401(k) plans after changing jobs. Unfortunately, this frequently results in their savings ending up in “safe harbor IRAs,” which tend to offer low yields and carry high fees, ultimately diminishing retirement funds.
One study suggests that by 2030, around 13 million former employees could see an estimated $43 billion in retirement assets automatically placed into these accounts, according to analysis from PensionBee, utilizing data from the Employee Welfare Research Institute.
A Safe Harbor IRA is typically established by a former employer to hold a 401(k) balance when the amount is below $7,000, especially if not transferred within a month or two of leaving the job.
While these accounts are supposed to securely hold small sums temporarily, PensionBee’s findings reveal they are often neglected.
“For years, most individuals have been using cash-heavy products, and fees are gradually chipping away at their savings,” pointed out Romi Savova, CEO of PensionBee, in the report.
Data indicates that merely 13% of safe harbor IRA accounts get transferred in the first year, and after three years, about 75% remain untouched. Given that these accounts often incur fees and are heavily invested in cash, returns typically trail behind inflation.
This can lead to significant losses in retirement savings over time.
For instance, a worker who leaves $4,500 in a safe harbor account may end up with roughly $5,500 at retirement, versus around $25,800 had they kept investing in a 401(k) or traditional IRA, as noted by PensionBee.
For employees who frequently change jobs and leave behind multiple accounts, the lifetime deficit could be even larger, potentially exceeding $90,000 across various safe harbor IRAs.
PensionBee estimates that each year about 10% of small retirement accounts, affecting around 2 million individuals, are involuntarily placed in Safe Harbor IRAs.
Many individuals are unaware of this situation; only 20% reported that their former employer clearly laid out their options for retirement accounts post-employment, and a mere 10% received written guidance.
The report highlights that many savers mistakenly believe they remain in their previous employer’s plan, not realizing they have been downgraded to something that’s not conducive for long-term growth.
PensionBee encourages employees to become informed about the dangers of leaving accounts inactive and advises them to “actively select their IRA home” and keep an eye on any abandoned accounts to avoid losing money to fees.
It also urges employers to enhance their offboarding processes and communication strategies related to these financial transitions.
If you resign from your job and haven’t managed your 401(k), and if the balance was under $7,000, it’s likely those funds have been moved to a safe harbor IRA. It’s advisable to contact your previous employer to confirm or check any notifications you might have received regarding this transfer.
PensionBee serves to simplify retirement savings by allowing individuals to consolidate their 401(k) plans and transfer them into a new IRA.
