Retirement & Financial Planning Report

Investors increasingly have small and scattered retirement savings accounts and that trend appears likely to continue, says a report that says those investors are not getting the most potential value from saving in those accounts and can be at risk of losing track of them and even abandoning the money in them.

“Some account balances are cashed out early, while others are eaten away by administrative and management fees. In far too many cases, employees lose track of their past accounts. These situations make retirement planning more difficult and endanger retirement security for millions of households,” says an analysis done for the Brookings Institution.

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It said that workers can accumulate a number of accounts as they change jobs, since many employers—including the federal government, through the TSP—automatically establish such accounts for employees, but the accounts do not automatically move to a new employer when the individual does.

It said that while the trend is especially common among younger workers who are more likely to change jobs, and to do it more often, overall about 20 percent of households have defined contribution plans with balances below $10,000. In addition, individuals may have multiple IRA accounts and other tax-favored accounts; about 16 percent of households have IRAs below that level, it said.

Some such plans charge a flat annual maintenance fee, it added, which on a percentage basis reduces the value of a small account balance more than it does a larger account. In addition, it said, smaller accounts are more likely to be withdrawn rather than transferred to another tax-favored account when the owner changes jobs—so-called “leakage.”

Account holders also can at times lose track of those accounts and abandon the money, it said. It said that is especially a risk when an employer automatically converts a 401(k) account to an IRA account for departing employees; a change of job sometimes is accompanied by a move and the records may not catch up to the individual. “Small accounts involuntarily rolled into an IRA because they belonged to a nonresponsive terminating employee are about 10 times more likely to be abandoned than small accounts that are not involuntarily rolled over,” it said.

It recommended steps to make it easier for people to keep track of their accounts and exploring the option of combining the different types of retirement savings accounts into one, which would stay in place regardless of job changes, much like crediting toward Social Security.

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