‘Left-behind’ 401(k)s could cost job-hopping workers $90,000 by retirement

Safe Harbors IRAs are designed to preserve rather than grow capital, therefore combined high fees and low returns of many mainstream providers work against this goal, and may even deplete forgotten retirement accounts to $0, according to market analysis by PensionBee.

Regulations require Safe Harbor IRAs to use low-risk investments, usually offering far below standard retirement portfolio returns, often below the rate of inflation. Many Safe Harbor IRA providers use bank deposits with very low interest rates, sometimes as low as 0.5%.

Unlike 401(k) plans, which have an average fee of approximately 0.85%, Safe Harbor IRAs charge seemingly small monthly fees ($1-$5) that quickly accumulate, and these fees often exceed any earnings and actively deplete principal. Certain providers have been known to pay even less than 1% interest while prevailing rates exceed 4%, taking substantial portions of investment returns as a “bank servicing fee.”

Younger workers face a perfect storm. Not only do Gen Zers change jobs often, but they are also opening retirement accounts earlier than ever before. The average Gen Zer starts saving for retirement at age 22, compared with millennials, who began at 27, Gen X, whose average age was 31, and boomers, who didn’t start until the age of 37.

The combination of changing jobs more frequently and opening retirement accounts earlier than their predecessors creates a dangerous vulnerability. Gen Z is more likely to accumulate multiple small 401(k) accounts that are prime targets for automatic transfers to Safe Harbor IRAs, which were never meant to be long-term investing vehicles.

“Former employee 401(k)s are at risk as quickly as 30-60 days after departure,” said Helene O’Brien, VP of Employer Partnerships, PensionBee. “The minimum notice period varies, but most plan sponsors roll over ex-employee 401(k)s routinely in batches - so the timeline really depends on the administrator. There’s often no set timeline that employees can count on, which makes the notice period requirements even more critical.”

PensionBee’s latest research compared growth trajectories of Safe Harbor IRAs (~2% returns) and 401(k) investments (~5% returns), to model the difference in returns between employees whose small balances are forced into low-yielding accounts and those who are not.

The findings suggest that automatic rollovers into Safe Harbor IRAs with low-yielding accounts harm former employees and can lead to an exponential difference in returns across several accounts.

PensionBee’s analysis looked at a typical worker who job hops between the ages of 20 and 30, leaving behind a 401(k) every two years (five total) and has a starting salary of $50,000 that grows 10% with each new job. Retirement balances were calculated as 3% of that salary annually, with 50% employer match vested.

PensionBee's analysis shows that a typical 20-year-old worker who leaves behind a $4,500 retirement account will see it grow to just $5,507 by retirement age if left in a typical Safe Harbor IRA. Had that same amount been rolled over to a traditional 401(k) earning 5%, it would grow to $25,856, a difference of over $20,000 from a single account.

The impact compounds dramatically with multiple job changes. Someone who switches jobs every two years in their 20s and rolls over their accounts each time saves over $90,000 more by retirement than someone who leaves them in Safe Harbor IRAs. This difference exceeds the median American retirement savings of $87,000.

“Employees should understand their retirement options, but the system isn’t easy,” said O’Brien. “The process often involves paper checks, inconsistent rules, and no standard path. If you change jobs 10 times, you may face 10 different rollover experiences”

Employees generally have four choices for their retirement account when switching jobs: keep it with your former employer, transfer it to an IRA, move it to your new employer's plan, or cash out, potentially triggering penalties and taxes. “That’s why employers should take responsibility for helping employees navigate it,” said O’Brien. “During a stressful job transition, a notice about 401(k)s can easily be missed or ignored. Plan sponsors should go beyond minimum requirements to ensure workers are informed and supported.”

Related: The cost of switching jobs: a $300,000 loss in retirement savings

The silent drain of retirement savings through inadequate Safe Harbor IRAs remains largely invisible to millions of Americans who switch jobs regularly. "Safe Harbor IRAs represent a critical blind spot in America's retirement system," notes Romi Savova, CEO of PensionBee. "The lack of transparency in these accounts is particularly troubling, as most assume that the money they put towards their retirement will remain theirs. The difference between investment defaults matters enormously."

Savova emphasizes that "these seemingly small default decisions have profound long-term consequences for savers. Greater transparency around default investment strategies would empower consumers to make informed choices about their financial future."

“The best thing employers can do right now is proactively educate employees on their options: leave it where it is, cash out, roll it into a new employer’s plan, or move it to an IRA that they can take with them anywhere,” said O’Brien.

“Unlike health insurance, retirement plans come with few communication requirements. Many employers assume workers know what to do, but too often, people switch jobs without understanding the long-term impact of leaving accounts behind. It’s on employers to clearly explain both the benefits and consequences.

“That means more frequent communications throughout the employee lifecycle, especially during offboarding. Departing employees should be alerted that their funds could be subject to forced rollovers if their accounts are less than $7,000, and that with more job changes comes more forgotten accounts - 30 million and counting. Employers can help by encouraging workers to find a ‘forever home’ for their retirement savings, like a personally managed IRA.”