IRA ‘Junk’ Bunk

 There’s a “new” retirement crisis to fret about — and it involves so-called “junk” IRAs.

You may have seen the recent Wall Street Journal’s headline that proclaimed “Forgotten 401(k) Accounts Are Costing Americans Billions in Lost Investment Gains.” This particular assertion turns out to be another spurred by (yet another) proclamation from an IRA provider (PensionBee), though this one at least doesn’t manufacture quite as ludicrous a compounding of the size and number of those accounts as others[i] have done.

More precisely, the issue they raise is that smaller retirement plan balances can, and often are, legally expunged from the plan of their prior employer into an IRA.  

Now, retirement plan professionals know how this works — those who sever (or who are severed from) employment with less than a $1,000 balance will likely have that distributed to them in cash, those with balances above $7,000[ii] will generally have the option to leave that balance behind,[iii] and those with balances in between those two figures … well, if the employee doesn’t make a separate election, their former employer has the option[iv] to distribute out these “small” balances to an IRA.

Not just any IRA, mind you — the law (ERISA) requires a review and selection process that the plan fiduciary must enter into a written agreement with the IRA provider that — among other things — addresses the investment of the rollover funds and the fees and expenses to be charged to the account. With regard to the former, the rollover funds must be invested in a vehicle “designed to preserve principal, and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with liquidity,” such as money market funds, interest-bearing savings accounts, certificates of deposit or other “stable value products.” 

With regard to the latter, the fees assessed against the IRA cannot exceed the amounts charged by the IRA provider for comparable IRAs established for rollover distributions that are not automatic rollovers. Sound like “junk” to you?

Oh — and participants are required to receive notice of this. 

So, what’s the big deal? Well, to put a “face” on this crisis, the Wall Street Journal manages to find a person who admits that she was told about this when she left her job, but “busy with her new job,” didn’t do anything about it. Only to find out (much later) that the IRA balance declined during that period — because the return on that IRA ($6.98) was less than the fees in the IRA ($15). This individual now says she feels “duped” — because she missed out on market returns (24% that year,[v] according to the WSJ) while “busy with her new job.” 

Well, cry me a river. 

So — how are these “junk” IRAs costing Americans billions? PensionBee leans on data from the Employee Benefit Research Institute (EBRI) to say that “By 2030, 13 million accounts worth $43 billion are projected to be swept into Safe Harbor IRAs through automatic rollovers.” Now, considering the size of the overall retirement savings market, that’s not a lot — but it IS, at least the purported “billions,” and from a credible source.

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But then the white paper that highlights the issue cautions about the “threat” posed by so-called “junk” IRAs — and by “junk,” they apparently mean IRAs other than the ones they offer.

Look, what this individual — and the “millions” of others like her — aren’t helped to appreciate by this article is that the provision here not only likely helped preserve their retirement savings, but spared them from paying the taxes and penalties that would have been assessed if they had simply taken that distribution in cash. Oh — and that they were told they had an opportunity to make a different decision, and just … didn’t.

That’s not the fault of the employer, the 401(k) plan, or the IRA she was invested in, despite the pejorative label a competing firm wants to apply to it.

The only folks being “duped” are the ones who fail to see what the real problem here is.

• Nevin E. Adams, JD

 

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[i] See Talking Points: Third Time No Charm in ‘Forgotten Account’ Fantasy

[ii] Previously $5,000 – SECURE 2.0 increased that to $7,000.

[iii] Of course, those have wound up being described by another IRA provider as “forgotten.”

[iv] The WSJ article acknowledges that most employers do so since the cost to administer small-balance accounts generally drives up the plan’s administrative expenses.

[v] One wonders what she would have thought if that balance had been invested in something other than the conservative investments required by law during a bear market. Maybe relieved? 

What’s the Worst that Could Happen?

 Did you hear the one about how a rollover delay could cost you $76,000?

Hard to believe? Well, there’s a reason. To get to that number, the folks at PensionBee had to make not just one, but a series of worst-case assumptions. To get to $76,000, you have to assume:

• that you are waiting for a $100,000 check…
• that you get out of the market at exactly the wrong time — a low point right before an extraordinary market surge (that you miss, of course)…
• that continues unabated while you’re “out” of the market… (cause markets only go up)
  • oh, and you’re assumed to be out of the market for EIGHT WEEKS because it’s assumed that your rollover check got lost in the mail, and you had to have it reissued (during which, of course, the markets continue to rise)...
• Oh, and THEN you take that market uptick that you missed (cause, as we all know, markets NEVER go down)...
• 
  and then assume a 7% positive return thereafter on the money you missed (with fees of just 0.85%)… compound it for 30 years (because, apparently, you requested that distribution several decades ago… and voila! That rollover delay, compounded by a series of worst-case assumptions — well, at that point, it’s just math.

Now, that’s not to say it couldn’t possibly happen — but I think we can all admit it’s exaggerated for effect (clicks, anyone). In other words, it assumes the worst that could happen.

Roll ‘Plays’

Now, in fairness, at least PensionBee was honest enough to share their assumptions (and provide some alternate outcomes that were less severe). But, speaking from experience, the rollover process still…sucks. 

I actually contemplated rolling over my 401(k) accounts two different times over the years before the “finality” of retirement pushed me past my reluctance. Granted, in the 20-odd some years since I first contemplated (and struggled with) a rollover, things have improved (more on that in a minute). That said, EVERYBODY (and we’re talking three major 401(k) providers here) insisted on cutting a physical check[i] and mailing it to me (two checks, actually — Roths are distributed separately). 

Now, I don’t know about you, but mail service no longer seems to be as reliable as it once was. And the idea of checks of that size (and probably looking like checks) being dropped off in the mail — well, it gave me pause.[ii] Oh, I was “allowed” to pay a pretty significant premium for “expedited” delivery — but though we’re talking about rates in excess of what Federal Express or UPS might charge, we weren’t talking about delivery that was truly special. 

As it turned out, the checks did arrive (and yes, I paid the premium), leaving me out of the market for about a week. Mitigating that was that my chosen IRA provider allowed me to do a mobile deposit of those checks (Yay!), so at least I was spared the dilemma (and sleepless nights) of putting those in the mail…again.[iii]

Overall, I was pleasantly surprised at how much the rollover process has improved over the past 20 years. I was able to do it all without sitting on hold for interminable periods for the “next available operator” while listening to product pitches (or bad elevator music) — without talking to a single person, in fact, much less people from different firms (sending and receiving). 

I realize there is an opportunity for fraud with wire transfers — but surely no more than with the antiquated process of physically producing and dropping off checks with the United States Postal Service. And, honestly, what’s being charged for “expedited” processing (and with separate charges for Roth and non-Roth accounts) struck me as — well, excessive — certainly for what it seemed to provide (one hates to think of the non-special alternative).    

That said, the reality seems to be that our industry is (still) ever so much better at taking in money than in sending it “out.” Indeed, the cynic in me can’t help but wonder if that is deliberate. 

It may not be the worst that could happen. But there’s certainly room for improvement.

• Nevin E. Adams, JD

 

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[i] That is, unless you want to roll it over to THEIR IRA — in which case, electronic transfer was an option.

[ii] During this process, one of the insurance checks related to my mother’s estate — that looked like a check — was “misdelivered” to the wrong house. Fortunately, I have honest neighbors.

[iii] The New York Times recently profiled the experience of a participant that was not so fortunate — though his check got to him, it was the forwarded checks to his IRA provider that got stolen. See https://www.nytimes.com/2025/05/17/business/paychex-401k-rollover-checks.html?unlocked_article_code=1.KE8.bOS8.VimnT7OedYLF&smid=url-share