This Shocking Report Reveals How Ex-Employers Can Shred Your Retirement Savings
What happens next is the most shocking part of the problem. The GAO found that once ex-workers' money is in the hands of a financial institution, the fees charged against the IRA often exceed any minimal income the account generates. Using various combinations of account setup fees, annual management fees, and return assumptions, more than two-thirds of the theoretical forced-IRA scenarios resulted in a $1,000 forced-IRA account being completely eaten away by fees within 30 years, and some saw funds disappear in as little as nine years. Indeed, the GAO's conclusion was that an account would have to earn annual returns of more than 7% just to hold even with inflation after taking out all the fees that typical financial institutions charge.
The scope of the problem
Given the small dollar amounts involved, this might seem like a big problem. But the sheer number of people that fall prey to these regulations is staggering. From 2004 to 2013, departing workers left 16 million such accounts in the hands of their former employers, representing $8.5 billion in total. Given the study's findings, it's likely that a large portion of that money will simply disappear in fees.
Yet that $8.5 billion is just the tip of the iceberg, because it ignores the lost returns from investing that money more prudently. The GAO compared what would have happened if regulations allowed ex-employers to invest forced-transfer IRAs in balanced target-date retirement funds, and it found that over 30 years, $1,000 would have grown to between $2,500 and $3,000 even after accounting for fairly hefty fees.
There are several potential solutions to the problem. Forcing employer-sponsored retirement plans to bear their own costs in transferring money to forced-transfer IRAs rather than charging accountholders large setup fees would take away part of the burden on retirement savings. Moreover, setting up rules that would allow ex-employers to better default investments in forced-transfer IRAs would help money grow larger over time.
One further suggestion that the GAO made involves tapping information available from the Social Security Administration that could help ex-employees keep a handle on retirement money at their former employers. By including notices in online Social Security statements, the SSA could give workers the information they need to take action to protect their money.
In addition, other countries have taken steps to solve their own versions of this problem. Some countries establish central funds for abandoned assets, while others seek to reconnect accountholders with their retirement funds. Some also use pension registries, which can also help ensure that workers don't neglect a forgotten retirement account at an old employer.
The best answer to the forced-transfer IRA issue is for workers to take responsibility for tracking their own retirement-plan money when they change jobs. Yet if the GAO's recommendations make that task a little easier, it could go a long way toward solving what has become a multi-billion dollar problem for retirement savers.
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