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? 

5 Ways Changing Jobs Puts (Your) Retirement at Risk

  Changing jobs can be a time of great energy and excitement — but if you’re not attentive, it can also undermine your retirement security. Here are five ways it can do so.

Cashing It Out

Probably the biggest job change risk to retirement security is the rollover decision. Generally speaking, most with balances less than $1,000 are automatically issued a check of their savings minus income tax and 10% penalties, those with between $1,000 and $7,000 are given two other options to cashing out: to roll over assets into a qualified IRA or to transfer to a new employer’s plan, while those with balances over $7,000 also have the option to leave their account with that old employer plan.

As you might expect, smaller balances are not only the most likely to be those of lower income individuals, but they also tend to be lower tenured and are more likely to be women. Oh — and if that individual has an outstanding loan? Well, that’s where the real “leakage” occurs. Remembering of course that there will be federal and possibly state/city taxes netted against it, not to mention a 10% penalty for all that are less than 59 ½.

Sizing the impact of this leakage is complicated, but the Employee Benefit Research Institute (EBRI) has estimated that each year approximately 40 percent of terminated participants elect to prematurely cash out 15% of plan assets. For 2015, EBRI estimated that $92.4 billion was lost due to leakages from cashouts.

Putting It in a Money Market ‘Mattress’

Even those who manage to successfully rollover their balance to an individual retirement account (IRA) can lose out on retirement account growth. A 2024 Vanguard analysis notes that 28% of rollover investors stayed in cash for at least 12 months, with minimal changes after the first three months following the contribution.

More than that, the report notes that among rollovers conducted in 2015, 28% remained in cash for at least seven years — and explains that younger investors, women, and those with smaller balances (who, of course, are the same groups that are more prone to cashouts in the first place) are especially prone to staying in cash for years following a rollover.

Which these days is pretty much the same result as sticking in under your mattress.

Leaving It ‘Behind’

In view of the hurdles cited above, it should come as no surprise that some go with the path of least resistance — and for some that means just leaving your account where it is. In fact, there are some recent surveys that suggest that employers are not only fine with that, there is some preference for leaving those balances — particularly larger balances — in the plan where they originated.

That’s just fine — and may even be preferable for any number of reasons — so long as you keep up with it. That said, it’s the kind of thing that’s easy to lose track of — that old employer may change recordkeepers, necessitating a new website/phone number to access your account, changes in investment options that might impact your account, or even — certainly if the balance is small enough — you just forgetting that you still have an account there. All in all, EBRI has estimated that over a 40-year period, those accumulations might add up to $1.5 to $1.99 trillion.[i]

Regardless, leaving one — or multiple — retirement plan accounts with your prior employer(s) may be the easiest thing to do at job change. However, that can make it more difficult to manage your retirement savings — and there have been situations where “forgotten” accounts have fallen prey to online theft, in no small part because they haven’t been accessed in a while, or perhaps not at all following a provider change. Just don’t let “out of sight” become out of mind.

Settling for Savings Rate Resets

Consider a 2024 Vanguard study that found that, despite having an increase in income from a job change, many workers experience a substantial slowdown in savings. The median job switcher saw a 10% increase in pay, but a 0.7 percentage point DECLINE in their retirement saving rate when they switched employers. And while most job switchers (64% of the income sample) experienced a boost to their income, just 44% increased or maintained their saving rate from their prior job.

Most (55%) actually DECREASED their saving rate in their new job. Arguably not because they intended to, but because they simply drifted along with the default savings rate at their new employer. Even when they experienced a pay increase of more than 20%!

Taking a New Job Without a ‘New’ Plan

A new analysis by the Employee Benefit Research Institute (EBRI) finds that when a worker did have a retirement plan at a job, they were more likely to stay at that job compared with workers who did not have a plan. The report notes that, for example, in 1996, 76.8% of retirement plan participants were still at the same job they had had in 1994 compared with just 58.1% of those who were not retirement plan participants.

On the other hand, among workers who changed jobs from 1996–2022, an average of 43.8% moved from a job without a retirement plan to another job without a retirement plan, while an average of 20.9% had a retirement plan at both jobs.

That said, only an average of 15.3% gained a plan upon job change. while an average of 20% lost access to a plan via work.

All that said, perhaps the most encouraging statistic comes from a recent Schwab survey of stock plan participants — and while that might be an unusual subset, according to the survey, 82% of respondents consider a 401(k) plan a must-have benefit when evaluating a new job, surpassing health insurance coverage at 78%.

Because, as we know, access to a retirement plan at work is the very best way to help provide for a financially successful life after work.

In sum, when making a job change, you should:

1. Look for ways to avoid taking a distribution (and incurring the substantial taxes).
2. Look to see if the new employer has a retirement plan — and whether it permits rollovers or not.
3. Make sure your rollover balance is properly invested.
4. Make sure your savings rate in the new plan keeps pace with your previous — and perhaps more if you got an increase.
5. And while you’re at it — it’s a good time to do a retirement readiness check-in to make sure that the plans for retirement are current.

-              Nevin E. Adams, JD

[i] There have been some ridiculous projections as to how much this adds up to. The point is valid — the math, not so much. See The True 'Cost' of 'The True Cost of Forgotten 401(k) Accounts.'

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

‘Mad Money’s’ Mixed Bag

  Last week a reader brought to my attention an episode of Jim Cramer’s “Mad Money” — an episode wherein he referred to the 401(k) as a “mixed” bag. 

In it, he acknowledged the benefits of tax deferral, the benefit of compounding on returns, and — where it’s found, anyway — the “free” money of an employer match. In that, he was at least more honest about such things than many[i] who make their living offering investment advice (generally accompanied by a subscription fee to their services — which, to be fair, Mr. Cramer has and mentions in this show). 

In point of fact, Mr. Cramer would clearly prefer an IRA option — if the contribution limits were equal to the 401(k) — though they’re not even close (not to worry — he says he’s going to continue to fight to remedy that situation). Indeed, Mr. Cramer counsels that once you’ve gotten the full match in your 401(k), you should just put everything else into an IRA (though he doesn’t get into the “nuances” of contributing to both in the same year). 

But Mr. Cramer is also concerned about the “hidden” fees in a 401(k) — so much so that he counsels folks to “always” roll out of that 401(k) when they change employers. And little wonder — since he appears to think that your typical 401(k) is charging administrative fees in excess of 200 basis points — more than 2%, in other words. I’ve no doubt those can be found but would caution Mr. Cramer that those are not the “norm.”

That said, he told viewers they should be “skeptical” of a 401(k) plan that doesn’t let you buy individual stocks via a self-directed IRA — one that he maintains gives you “control” of your money. As he’s a stock picker (of sorts), it’s not surprising that he has an affinity for individual stocks[ii] rather than mutual funds (though he admitted that those who don’t have the time for the former might be well-served by investing in a low-cost index fund).

Indeed, as do most folks touting mass media investment advice, Mr. Cramer prefers the ability to go beyond the investment menu “constraints” of a 401(k) menu — and surely for individuals like him who have the time and expertise (or think they do) to make and track individual investments, that resonates.

Programs like “Mad Money” are ostensibly positioned for more experienced/engaged investors — though that did NOT seem to be composition of the callers to this particular episode. Just as well, because he wasn’t providing much more than high-level generic wisdom on basic tax deferral, compounding benefits,[iii] and a heavy dose of equities in your portfolio until you get to your 50s. 

The reality for most individuals, of course, is that without a workplace retirement plan, they don’t save for retirement, much less invest. The match may be “free” money for the individual, but it surely has a cost — one borne by their employer in support of their eventual retirement. The mutual funds Cramer rejects are — increasingly — a portfolio not only selected, but managed by professionals, either in a target-date fund or managed account. For most, it’s not “mad” money, after all — it’s about thoughtfully building a secure, reliable financial foundation.   

Those with “mad” money to spare might not need that kind of help — but plenty of “regular” people do.

• Nevin E. Adams, JD

 

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[i] See Is the 401(k) Really a 'Horrible' Retirement Plan?, When You Assume, The 'Plot' Thickens

[ii] He did make an interesting argument for investing in stocks as a way to curb spending. Specifically, he noted that you’d have to sell your favorite stock in order to raise the cash to spend — and that you wouldn’t want to sell that favorite stock — so you wouldn’t spend the money.

[iii] One assumes that he’s more specific in his “investment club,” which came up several times during this program.