Can’t find an old 401(k)? Your retirement money could be losing ground

A 401(k) is meant to increase in value over time, helping workers build the savings needed for a comfortable retirement.

But that promise can be undermined when people lose track of an old account. Automatic rollover IRAs do not necessarily protect savings the way many workers assume. These accounts typically earn interest in a cash-equivalent holding, where returns may be around 1% or 2% a year while fees still chip away at the balance.

Millions of Americans have left small 401(k) balances behind with former employers, and many may not realize that money can quietly erode over time. One study found that 46% of automatic rollover IRAs declined in value after one year. After eight years, 87% of the accounts were still worth less than when they were created.

“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, chief executive of PensionBee.

Missing growth

The shrinking value of these accounts runs counter to the purpose of the 401(k) system. The idea is for American workers to build retirement nest eggs over decades of compounded growth by investing in stocks and bonds, rather than leaving money in a low-interest cash-like 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. PensionBee reported data from the CRI account.

Automatic rollovers are becoming more common as tax-advantaged retirement accounts expand and automatic enrollment spreads among new workers.

The number of automatic rollovers is projected to rise from 1.1 million per year in 2022 to 2.2 million annually in 2030, according to research by PensionBee and the Employee Benefit Research Institute. By then, 15 million accounts holding $82 billion in retirement assets could sit in IRA purgatory.

America may finally have a plan to survive without pennies.

Daniel de Visé USA Today

Preserving value

Congress created “safe harbor IRAs” as a way for employers to preserve retirement funds for departed workers.

The law set a balance cap of $3,000, later raised to $7,000. Employers may create rollover accounts without a worker’s consent, but they must keep the money in a cash-equivalent investment — in theory, to preserve its value.