True or False: People with a small amount of funds in a 401(K) plan should leave funds in the employer-based 401(k) plan when they switch jobs.
False: Many companies will move funds of departing employees to high-fee low-return IRAs. These IRAs will not benefit their owners.
Discussion:
- The Secure Act 2.0 mandated automatic enrollment of new workers in the firm’s small 401(k) plan.
- Many employees routinely leave 401(k) assets at their old employer.
- Employers routinely move assets left behind in 401(k) plans to high-fee low-return IRAs.
- Prior to the Secure Act 2.0 employers had the right to transfer all 401(k) plans with assets less than $5,000 to a high-cost IRAs.
- The Secure Act 2.0 increased the transfer right to all plans with less than $7,000 in assets.
- Even relatively small differences in retirement plan fees can lead to a large decrease in accumulated assets as shown in Example Two, here.
The logic of the automatic enrollment provision in Secure Act 2.0 was to encourage workers to start saving early for retirement because automatic enrollment was in their best interest. Automatic transfers of 401(k) assets to well-run low-cost IRAs would also be in the best interest of workers but the law does not mandate or even recommend automatic transfers to low-fee highly diversified accounts.
The combination of automatic enrollment and not automatic transfers seems to benefit the wall street firms sponsoring high-cost retirement accounts.
The Secure Act 2.0, a law that was passed with bipartisan support, does more for Wall Street investment firms than workers. It does seem as though that modern capitalism does more to manipulate rules to the advantage of the firm over the consumer than in providing a good reliable product or service.
Problems caused by the forced transfer of abandoned 401(k) assets to high-cost IRAs are discussed in this New York Times article. Financial tip #5, presented in this list of tips, makes the case for routinely moving 401(k) funds to low-cost IRAs.