Could a forgotten 401(k) be shrinking your retirement future? Craig Copeland, Ph.D., Director of Wealth Benefits Research at the Employee Benefit Research Institute, explains why old workplace retirement accounts can be costly to overlook. Jeffrey Snyder, Broadcast Retirement Network Well, Craig, it’s so great to see you. Thanks for joining us in the program this morning. Thank you for having me. It’s a pleasure. It’s always mine. I always enjoy the research that you and the EBRI team put together, so it’s a pleasure to have you. You know, I wanted to talk about auto IRAs, and you in particular did, you and the eBrew team did some research about the decline in value of auto IRAs. So before we get into that research, do you have a general sense for how big a market we’re talking about? Because my understanding is the auto IRA kind of came into practice during EGTRA in 2001, implemented in 2002, so there’s probably a lot there. So how big are we talking here? Craig Copeland, Ph.D, Employee Benefit Research Institute Well, we’re talking around about $30 billion in these accounts, and we have over 10 million to 20 million of these accounts out there. And it’s even expected to grow more because Secure 2.0 increased the dollar amount that was allowable for the auto IRAs or the forced out from the 401k plans of these small accounts up to 7,000. So that’s going to greatly expand the market since that change, because you’re going to get more and more accounts in that range from 5 to 7,000 than just being under 5,000. Jeffrey Snyder, Broadcast Retirement Network Yeah, I mean, that is still, I mean, that’s a lot of money, that’s a lot of accounts. And I understand, we’re not going to debate the merits of the, I understand why the provision was there, you want to make sure that people can have their account, and it rolls over to something that could potentially earn interest. But let’s talk about what actually happens, because you and the team, as I said, did a lot of research here. These accounts actually sit in an IRA, but they don’t do as well as you would think. They’re not as exposed to the market in some cases, right? Craig Copeland, Ph.D, Employee Benefit Research Institute Right, because the investment option that they have to go into is essentially a cash-like investment, because the whole idea of these accounts was to make sure they preserve value. And originally, the thought was that they would be moved quickly, so you didn’t want to put them into something that would turn around, lose money in the first couple of months, and then when you went to move it to wherever you want to, it had lost value. And unfortunately, during the, most of the later 2000s, 2010s, interest rates went down very, very low. And there is a cost of maintaining accounts, regardless of the size. And once you have that standard fee size that they have for accounts, when you had money markets at rates that were less than a half a percent, if only like 0.1%, they were not able to cover the flat fees that it takes to administer account. And therefore, once you knitted out the fees, your account balance was going down in nominal dollars. Instead of having $1,000, you may have had $950 or whatever it was, because of that virtually no interest covering the fees that it costs to administer the accounts. Jeffrey Snyder, Broadcast Retirement Network So clearly, unintended consequences here. Obviously, not obviously, but you create rules and regulations and have legislation, I think for the betterment. That was the intent here. Maybe it didn’t work out that way in practice. As you were saying, I think a lot of these were invested in like money market accounts, right? So they were like money market mutual funds that to your point, raise very little return, as opposed to in a qualified retirement plan, like a 401k, you have a default of a QDIA, right? A target date fund or something like that. That’s not the case here. Craig Copeland, Ph.D, Employee Benefit Research Institute Right. And because that’s the way the regulation was set up is that they have to go to a cash. So that’s where we’re at. Yeah. The default in a 401k plan is a target date fund, which does have a great deal of equity exposure. And if you’re younger, it’s virtually the entire investment. And that’s one of the things that the hope was, well, if you force them out and you send them a check, you’re giving them money, the money’s left the system. Plus there’s a tax penalty. Whereas if you rolled into the IRA, there’s no tax penalty. It’s still in the system and a tax preferred vehicle. The hope wasn’t that people would keep track of the money and move it to their next employer, because one of the things that they allowed you to do was to move your IRA into an employer plan. If your employer allowed it, more and more employers are doing that. Or you could actually go and invest it to take the time and invest it within that IRA as well to take advantage of the long-term higher returns that have prevailed in equity investments. Jeffrey Snyder, Broadcast Retirement Network So let’s talk about, you made a really good point. And as you were talking about, someone can go in to their account. Do people lose track of their account? Because I’m a reform record keeper. When I used to do less than 5,000, 4,000, you had to send out letters and confirmations, but addresses weren’t updated unless you updated them. So have people forgotten about these accounts? And if so, what is the impact to the overall retirement readiness of people? Craig Copeland, Ph.D, Employee Benefit Research Institute Well, I mean, they are still required to send out notifications. But the big thing is that you have to go through the plan administrator to change your address. So you still have to work with your former employer. In a lot of cases, you don’t know what your former employer is. And many times when you change jobs, you’re also moving. So there’s a good chance that the address is not ever given to the plan administrator who gives it to the actual record keeper that does these things and gets the right address. So they’re never notified. And sometimes when you’re notified, you don’t understand what it means or it’s something you’ll take care of later. And if you’ve moved in the meantime, you may not get that next statement that comes around to think about, oh, yeah, I still have that account and do something with that. And the problem is not only do you lose track of it, so you may be sitting on money somewhere that could have been growing, particularly for a younger person that could, you know, by the time you retire, could have double, triple, potentially quadruple, depending on how much you invested over that 30 years. But then you lose it just whatever nominal amount, but then you weren’t ever invested in it. So it just really kind of potentially defeats the purpose of setting up this account if the money is not remembered and it’s not invested. And, you know, in some cases, these accounts, if they’re left dormant for so long, end up in, you know, in the state lost fund programs. And therefore, you know, you don’t know where the money is at that point. And we really have these issues of not these assets not building up. And therefore, that gets back to the retirement security. If that money that you save in these early jobs don’t compound and build up like you expect, then that changes the entire retirement security question because a lot of the job change does happen when you’re younger. And that gives you the longest time to have the compounding. So if you miss out on those accounts, you’ve lost out of that investing early and that compounding that you would have by the time you retire. Jeffrey Snyder, Broadcast Retirement Network So are there ways, so say I had a former employer plan, I lost track of it because I didn’t update my state, my address, you know, are there ways for me to, and again, we’re kind of deviating a little bit from the research, but I guess the natural question is how do I find an account if I’ve lost one? Don’t they have databases to find forgotten? Craig Copeland, Ph.D, Employee Benefit Research Institute I mean, the Department of Labor was required to start a database of lost accounts. Jeffrey Snyder, Broadcast Retirement Network Yeah. Craig Copeland, Ph.D, Employee Benefit Research Institute Unfortunately, the participation is voluntary. I say that unfortunately for people to be able to find them. I mean, it is costly to, you know, provide all that data to the Department of Labor. So that’s one place to start. If your employer is still in business, they should be able to direct you toward where their money was sent, who was maintaining their rollover IRAs because they’re supposed to pick them through a fiduciary process. So they should be able to track it that way. Otherwise, you know, as I said, some end up in the state lost fund programs. That’s another place to look. And in some cases, if you remember who your record keeper was, when he was active, you may go to them because they may be able to track where that money was sent. And in some cases, they may also administer the rollover IRA as well, depending upon who that company is. So there’s four, you know, at least four ideas of trying to do it of how to find them. But even with that, it’s not always easy because if your employer’s gone, you don’t know where it is. If it hasn’t gone to the state lost funds programs, you know, there’s another and you’re not required to send it to the lost accounts database that DOL is maintaining. So therefore, in some cases, you just may never know until. Until you maybe, I mean, something may happen, you know, at some point it may end up in the in the state lost program, lost funds programs. Jeffrey Snyder, Broadcast Retirement Network You almost have to be Sherlock Holmes. I don’t even know who the latest detective is, but you got to be. I grew up with Arthur Conan Doyle, Sherlock Holmes. So you have to be really a net detective to find that information. Uh, is, is this an opportunity with the secure, secure 2.0 expanding the limit effectively from 5,000 upwards, which means more money is going to roll over. Is this an opportunity to create more automation? And again, we’re, we’re kind of going away from, I recognize you’re not a record keeper, but you have deep insight into this issue. Is this an opportunity for kind of more connecting of the dots technologically? It seems like we could do it. Craig Copeland, Ph.D, Employee Benefit Research Institute Well, I mean, there is auto portability program that’s been established and is, is available to be used through this process. And it has to go through the IRA and, and then there’s, you know, a network of record keepers that can join to make this a fully automated process. However, the structure is allowed, but it’s not required. So both the record keepers have to opt into the network and each plan, the plan you had your money in and the plan you were going to had to be, had to opt into the program too. So there is some structure to do it, but when it’s voluntary, it makes it hard because you really have to be able to find both plans on both sides to make it an automated process. Another hitch in the program is that there is a growing ability to do Roth contributions. And since the way the process is set up, it has to go through an IRA, but a Roth IRA cannot be rolled into an employer plan. Only a traditional or a deductible can. So therefore, if it gets into the system as a Roth IRA, it’s stuck even under an automated process because the rules didn’t, you know, follow that, you know, now that there is the capability or the differences, there’s no more differences in the withdrawal rules from a Roth IRA versus a Roth K. There seems like they should be able to be rolled over now because in the past, you know, you had to take withdrawals from a Roth IRA, excuse me, from a Roth K, but not from a Roth IRA. And now you don’t have to take withdrawals from either of them. So it seems like now would be the time to equalize all those because that’s another pool that even with an automated process that has been set up, it’s still stuck in the, in that auto IRA part until someone makes a decision to move that IRA into their own IRA or actually like really invest in the IRA it’s been rolled over into. Jeffrey Snyder, Broadcast Retirement Network Yeah. It’s a, I think there’s an opportunity maybe when secure 3.0 eventually, you know, they’re, I know they’re working on a lot of different bills. Maybe that’ll be an opportunity to kind of quote unquote, clean this up. Because as you said, more money is going to be rolling over. Craig, I can’t let you go without maybe a tease out of some research that you have coming down the pike, whether it’s related to IRAs. I know you do a lot of wealth strategy and wealth management research. Can you give us a little bit of a tease of what you have coming down the pike? Craig Copeland, Ph.D, Employee Benefit Research Institute Well, I mean, one of the things that we’re looking at the impact of the student loan matching program and how that can help those individual student loans. We, we did, you know, one paper and showed the clear difference that those had student loans was much lower in both their contribution rates and the balances they’ve been able to accumulate. We’re also doing some work on potential on the financial wellbeing side of financial education in the workplace and how that’s correlated with better outcomes for those workers that participate in that education program. So that’s a couple of the highlights that we have coming out. Hopefully both of them before the end of the year. Jeffrey Snyder, Broadcast Retirement Network Yeah. And maybe you’ll come back again. I haven’t chased you off. Hopefully you’ll come back, talk to us about that, Craig. We’re going to have to leave it there. Thanks so much for popping by the program, talking about your research. And look, as I said, we look forward to having you back again very soon. Craig Copeland, Ph.D, Employee Benefit Research Institute Okay. Thank you.
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