Not rolling over your 401(k) might be costing you money

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“Roll over my 401(k) from my old job” is one of those financial tasks that many of us have had to do at some point—and likely put off for far longer than we should have. But according to a new report, the cost of procrastinating may be higher than you think.

When you leave a job and have a 401(k) balance below $7,000, employers often transfer your old account into an automatic rollover IRA, also known as a safe harbor IRA.

As the name implies, this transfer keeps your account secure, but it also means your former employer doesn’t have to manage the retirement funds for you. Unfortunately, in practice, that can mean that the account balance is slowly leached away over time.

You can thank account fees and missed investment growth for that—generally, the funds moved to an automatic rollover IRA are held in cash equivalents that likely earn far less than inflation, plus much higher fees can be levied. If you let it sit there for years on end, as many people do, the balance erodes over time. Many even hit $0.

It’s not an isolated problem, either. A new report from retirement plan consolidation company Pension Bee puts the total left-behind 401(k) pot at 30 million accounts holding approximately $2 trillion in assets. A third of those are estimated to hold less than $7,000, according to the Employee Benefit Research Institute (EBRI), meaning they are likely to be rolled over to the safe harbor accounts. Pension Bee estimates that by 2030, $43 billion in assets will be held in these accounts.

And as more people both invest for retirement and leave jobs more quickly, whether by choice or layoffs, the number of old accounts will only grow.

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Moving on from the safe harbor

These safe harbor accounts are meant to be a temporary home for your 401(k) assets before you roll them over into an IRA of your own. But 87% of old 401(k) accounts still remain after one year, and 52% remain after eight, according to Pension Bee.

“The losses start on arrival,” the report says of what happens to the retirement savings that are transferred to a safe harbor IRA. “Nearly seven in 10 accounts saw a decrease in value after the first year, likely due to high account opening fees.”

Account opening fees aren’t the only charge eating away at these accounts. Because former employees are no longer active participants in the 401(k) plan, they can be charged monthly maintenance fees previously subsidized by the employer, platform fees, and fund fees, among others.

Some examples of fees from the report (these vary and are not always public info):

Opening fee: $50 to $100, or as much as 20% of the initial balance
Monthly fee: $1 to $5
Search fees: up to $20
Auto portability fee: $30+
Partial consolidation fee: $59+
IRA consolidation fee: $59+
Stop and reissue fee: $30+
Redemption fee: $15+

“When levied against a small balance, the fee schedule of a typical Automatic Rollover IRA may lead to a persistent drag that the low-yielding accounts are not designed to recover from,” the report reads. Younger workers, hourly workers, women, and workers of color are more likely than others to have these lower balances.

If you were automatically enrolled in a 401(k), you might not even know you had an account open at all. So how can you make sure you are taking all of your retirement money with you when you leave a job?

Of course, employers play a major role here, as do policymakers. Prior Pension Bee research found workers who did not receive an explanation of their retirement options when they left a job were more than four times as likely to lose track of their 401(k) as those who received clear info.

Pension Bee argues that policymakers should “update regulations designed for a static, single-employer career model to fit today's mobile workforce,” reads the report. They know how to do it, as the recent success of SECURE Act 2.0 shows.

But as with so much of our financial lives, we have to play offense here. Always ask your employer about their 401(k) offerings when you start a job and when you leave. Make sure you know what company is the custodian of the account, and get all of the paperwork for a rollover before you sign off on your last day.

“Your retirement is your responsibility,” the report reads. “Leaving it behind makes it someone else’s problem, and their solution may come at your expense.”

If you don’t roll over your 401(k) right after leaving an employer, make sure you provide them with updated contact info so they can get in touch with you about the account in the future. And if you’ve left a job recently, consider what happened to any retirement account you may have had.

Even if you have managed to save only a few hundred dollars in the account, that can still compound to far more than that over time. Don’t leave it behind!