I’ve come across many a client who, by virtue of the nature of the job market nowadays (average time a person spends at an employer is about 4.5 years), has 2 or more 401(k) accounts to his or her name. If this sounds like you, pay attention to the article below; especially if your solution when you left the job was to leave your 401(k) there too and your account balance was less than $5,000.
Bottom line: every dollar saved for retirement should matter to you, and it definitely doesn’t pay to lose track of where this money is.
By Ashlea Ebeling
Ex-employees are leaving behind orphan 401(k) accounts with abandon, and employers are dumping the funds into forced Individual Retirement Accounts with conservative default investments, where they whittle down to nothing, according to a new Government Accountability Office Report, 401(K) Plans: Greater Protections Needed for Forced Transfers and Inactive Accounts.
At one IRA provider the GAO studied, an unclaimed $1,000 account would be reduced to zero in just 9 years (to blame: a $50 one-time account set-up fee, a $50 annual fee, and a $65 annual address search fee, combined with an 0.11 percent investment return).
How big is the problem? In a survey of nine IRA providers, the GAO found more than $3.4 billion languishing in 1.8 million forced IRAs as of 2013. One provider that reported data to the GAO projects that more than 600,000 new forced IRAs could be created each year, given attrition rates, the percentage of vested 401(k) balances under $5,000 and the rate of non-responsiveness among employees leaving jobs – and their 401(k)s behind. And only half of 401(k) plans currently force out former employees with 401(k) balances of $1,000 to $5,000, according to the Plan Sponsor Council of America.
Here’s why workers need to pay attention. If you have $5,000 or less in your 401(k) when you leave your employer and don’t say what you want to do with the money, your employer can close your 401(k) account and park the cash in a money market account in a forced transfer IRA. Low-wage and young workers are especially vulnerable because they change jobs often and are likely to have low balances, the report notes.
But a plan can force out a former employee with a much higher balance–attributable to rollover contributions from another 401(k)–if less than $5,000 is attributable to contributions at that employer. Say you save up $15,000 in a 401(k) and transfer it to a 401(k) at your new employer. If you’ve saved less than $5,000 at the new employer and leave for a third job, you could be forced from the second employer’s plan because less than $5,000 is attributable to that plan. The $5,000 has to be vested too, making it harder to meet the threshold.
“Participants trying to consolidate their savings as they move from job to job could ultimately lose their ability to remain in a 401(k) plan,” the report warns.
We’re a nation of job hoppers: 38% of workers change jobs in a given year, according to the Bureau of Labor Statistics. Over the last 10 years, 25 million employees left at least one account behind and millions left two or more behind, according to Social Security Administration data. Automatic enrollment is likely to exacerbate the accumulation of multiple, small accounts, the GAO report predicts. More employees are getting put into 401(k)s without any effort on their part, and when they leave their jobs, they disregard the retirement benefits they’ve built up.
Information that could help workers reconnect with orphan accounts comes too late, the GAO says. The potential private retirement benefit information notice—issued by the Social Security Administration—includes the name of the plan where a participant may have savings, the plan administrator’s name and address, the savings balance and the year the savings was left behind. SSA sends the notice when a taxpayer files for Social Security benefits, but the GAO says the SSA could help participants locate accounts by providing information earlier. You can actually request SSA-L99-C1 earlier (SSA said it received only 760 request for the form in 2013, although it maintains records of potential benefits for over 33 million people). GAO recommends the SSA consolidate data from multiple employers on one document instead of sending out multiple forms—and that it put the information online so you could access it like you can access your Social Security statements online now.
The GAO report also looks at how other countries are doing better. Australia, the Netherlands and Denmark all have pension registries, a single source of online information on new and old retirement accounts. There are better ways of dealing with inactive accounts too. The United Kingdom consolidates savings in a participant’s new plan, and in Australia, small inactive accounts are held by a federal agency that preserves their real value until they are claimed.
Here’s what the GAO recommends.
*Congress should permit alternate default destinations for small 401(k) account balances in addition to forced IRAs.
* Congress should repeal the provision that allows plans to disregard amounts attributable to rollovers when determining if a participant’s plan balance is small enough to transfer it.
*The Social Security Administration should provide information on benefits individuals may have from former employer plans along with online Social Security statements. (The SSA said it would seek legal guidance to see if it might include a general statement encouraging individuals to pursue external pension benefits).
* The DOL should expand the investment alternatives to include target date funds, for example. (The DOL says that this runs counter to Congress’ intent of parking the funds in safe investments).
The typical investment return for the 19 different forced-transfer IRA contracts the GAO reviewed ranged from 0.01% to 2.05%, and the fees ranged from $0 to $100 or more to open the account and $0 to $115 annually (one provider charged a 20% opening fee). Thirteen of the 19 accounts would decrease to $0 within 30 years. By contrast, the GAO estimates that if a $1,000 forced-transfer IRA balance was invested in a target-date-fund, the balance could grow to about $2,700 over 30 years.
* The DOL should explore establishing a national pension registry to help employees track retirement accounts.
Congress set up forced transfer IRAs in 2001 to protect the tax-preferred status of workers’ retirement savings. Before then, employers forcing former employees out of 401(k) plans could simply pay them in cash if their balance was $5,000 or less. With a cash out, there would be 20% withholding for taxes and an additional 10% penalty if the employee is under age 59 ½ at the time of the cash out. Today if an employee’s account is $1,000 or less, the employer can either set up a forced transfer IRA or cash them out.