Under current law, workers who leave behind retirement accounts with less than $7,000 can be forced out of their former employer plans into “safe harbor” individual retirement accounts.
A new report published by PensionBee and based on data from the Employee Benefit Research Institute shows that up to 2 million accounts annually are expected to be forced into safe harbor IRAs via automatic rollovers between now and 2030. By that time, an estimated 13 million accounts will sit in safe harbor IRAs with a total projected value of $43 billion.
As the report details, safe harbor IRAs were conceived as a temporary solution for small, left-behind 401(k)s. In practice, the majority of safe harbor IRAs become long-term traps that can drain retirement accounts through excessive fees and minimal returns — “junk IRAs,” as the report puts it.
To be clear, there are high-quality safe harbor IRA providers that charge only low and reasonable fees. However, funds are generally placed in "safe" default investments designed to protect the principal balance, rather than grow it significantly, especially in situations where a retirement plan account is automatically rolled.
Savers, then, could lose out on significant long-term growth that could support their spending needs in retirement. Additionally, PensionBee details, the American workforce is “exceptionally dynamic and mobile.”
“Frequent job changes are accelerating the risk to retirement readiness,” the report suggests. “One third of all retirement accounts are currently under the threshold for automatic force-out if left behind.”
The analysis shows that multiple safe harbor IRA rollovers in the course of a career leads to lower returns, potentially resulting in a $90,000 differential across multiple accounts over time. In extreme cases documented in the analysis, smaller accounts can be depleted to $0 through the combination of fees with minimal returns.
“The data provides much-needed numerical clarity on the scale and acceleration of the Safe Harbor IRA problem,” Romi Savova, CEO of PensionBee, said in a statement. “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.”
Additional findings show just 12.8% of displaced accounts are moved to a new retirement plan provider in the first year, and just 25% are moved after three years. This suggests that the system isn’t being used as the short-term solution it was intended to be.
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