401(k) Junkyard

According to a new Government Accountability Office Report, ex-employees are abandoning orphan 401(k) accounts, and employers are dumping the funds into forced Individual Retirement Accounts with conservative default investments and high fees.

In a survey of nine IRA providers, the GAO discovered more than $3.4 billion deteriorating in 1.8 million forced IRAs as of 2013.  One provider that reported data to the GAO projects that more than 600,000 new forced IRAs could be created each year, given attrition rates, the percentage of vested 401(k) balances under $5,000 and the rate of non-responsiveness among employees leaving jobs—and their 4011(k)s behind.  This could lead to big problems

Employers need to be cognizant.  If you have $5,000 or less in your 401(k) when you leave your employer and do not specify what you want to do with your money, your employer can close your 401(k) and put the cash in a money market account in a forced transfer IRA.  Low-wage and young workers are especially vulnerable because they change jobs often and likely have low balances.  “Participants trying to consolidate their savings as they move from job to job could ultimately lose their ability to remain in a 401(k) plan.” 

See Ashlea Ebeling, Employers Dump 401(k)s Into IRAs Costing Ex-Employees Billions, Forbes, Jan. 7, 2014.