An old 401(k) you forgot about could be shrinking your retirement savings

A 401(k) is meant to increase in value over time, helping workers build a nest egg for retirement.

But when someone changes jobs and leaves behind a small 401(k) balance, that growth may never materialize.

Billions of dollars are now parked in “automatic rollover” Individual Retirement Accounts, which are created when a worker leaves a job and their employer moves the 401(k) out of the workplace plan.

Unlike a typical 401(k), which can benefit from gains in the stock market, an automatic rollover IRA usually sits in a cash-like account. It may earn only 1% or 2% interest a year, while fees steadily reduce its value.

A white paper from retirement savings provider PensionBee, released on Oct. 21, examined what happens to these accounts over time. It found that after one year, 68% of automatic rollover IRAs had fallen in value. After eight years, 39% were still worth less than when they were opened.

“Millions of Americans have small 401(k)s sitting with old employers, and most have no idea that money can be moved into an account that slowly drains their savings,” said Romi Savova, CEO of PensionBee.

Growth that never comes

The decline of these accounts runs against the purpose of the 401(k) system. The goal is for workers to build retirement savings over decades through compound growth by investing in stocks and bonds, rather than leaving money in a low-yield cash account.

“You want this money to grow and be invested in a way that you can take advantage of these returns,” said Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute. The PensionBee report used EBRI account data.

Automatic rollovers are becoming more common as tax-advantaged retirement accounts expand and more employers automatically enroll new workers.

Research by PensionBee and EBRI projects that the number of automatic rollovers will rise from 1.1 million a year in 2022 to 2.2 million a year by 2030. By then, 13 million accounts holding $43 billion in retirement assets could be stranded in IRA limbo.

Accounts that lose value

Congress created “Safe Harbor IRAs” in 2001 to help employers preserve retirement money for departing workers.

The law originally covered balances under $5,000, a limit later increased to $7,000. Employers could set up rollover accounts without getting the worker’s permission, but they had to place the money in a cash-equivalent investment, in theory to protect its value.

These accounts were intended to be temporary. Yet PensionBee found that half of all rollover IRAs are still open eight years later, often because workers lose track of them or forget they exist.

Over time, low interest rates and administrative charges can erode the balance. An account provider may charge a $100 fee to open the account and a $5 monthly maintenance fee, both of which eat into the savings.

“Dollar-based fees of $30 or $50 per year, that can be really toxic on a small account,” Savova said. “There’s no way for the return on that account to outgrow the fee.”

Money left behind

Automatic rollovers are part of a larger issue: industry estimates put more than $2 trillion in forgotten or abandoned retirement accounts.

When a worker leaves a job with a 401(k), there are several choices. They can roll the money into another 401(k) or IRA. They can cash it out, which may trigger taxes and penalties. Or they can leave it alone.

If they do nothing and the balance is $7,000 or less, the employer will likely move the money automatically.

These low-yield accounts often belong to workers under 45, who tend to switch jobs and addresses more often.

“Maybe you were auto-enrolled in a 401(k), so maybe you weren’t paying attention to begin with,” said Kate Ashford, lead wealth writer at NerdWallet. “You’re changing jobs. There’s a lot going on. It’s not on your priority list, and the longer you wait, the lower it goes on your priority list, so it just sits there.”

How to check

PensionBee says you may have money in an automatic rollover IRA if any of these situations apply to you:

• You left a job and never claimed your 401(k).

• Your account balance was below $7,000.

• You moved or changed your email address.

• You received mail from an unfamiliar IRA provider.

If you think you may have lost track of an old 401(k), these resources can help:

• National Registry of Unclaimed Retirement Benefits: Search by Social Security number to see whether any inactive accounts appear. unclaimedretirementbenefits.com

• Retirement Savings Lost and Found Database: A Department of Labor tool for locating unclaimed benefits. lostandfound.dol.gov

• Missing Money: A clearinghouse for unclaimed property. missingmoney.com