Millions of Americans Are Losing Their 401(k)s Without Realising — Employers Are Moving Their Savings Into Cash Accounts That Barely Grow

US workers are missing out on billions of dollars in investment gains when they change jobs without realising it. Old employers are increasingly moving their 401(k) funds into individual retirement accounts (IRAs) parked in cash. This process, known as involuntary rollover, is common for accounts with small balances.

Currently, employers are also auto-enrolling new hires in 401(k) plans, and some employees may not even be aware they have retirement savings. Additionally, a recent law expanded the range of 401(k) accounts that employers can roll over into IRAs.

Risk of Stagnant Retirement Savings

'Balances in these IRAs often become fossilised. They simply stop growing,' said Spencer Williams of Retirement Clearinghouse.

Sometimes, employees forget to opt into 401(k) plans or to roll over their funds into an IRA. Others withdraw their balances prematurely, incurring taxes and penalties.

'The job switch is a time when a lot of bad things can happen to retirement savings,' warned Fiona Greig of Vanguard Group.

The law permits companies to involuntarily transfer accounts where the balance is between $1,000 and $7,000 (£762 to £5,335), provided they notify the employee beforehand. However, many workers overlook these notices or lose track of their funds. Once transferred, the IRA must be held in a money-market fund or bank account until the owner decides how to reinvest.

Why Do Employers Use Involuntary Rollovers?

Data from the Employee Benefit Research Institute (EBRI) shows that over 75% of savers retain their money in the IRA three years after an involuntary rollover.

Employers often opt for involuntary rollovers to avoid the administrative costs associated with managing small-balance accounts. Managing these accounts increases expenses, which can impact the plan's overall cost.

According to PensionBee's analysis of EBRI data, in 2025, approximately 1.7 million 401(k) accounts will be transferred into safe harbour IRAs. This figure is expected to rise to over 2 million by 2030. Currently, around 10 million safe harbour IRAs hold about $28 billion (£21.3 billion), with that amount projected to grow to $43 billion (£32.7 billion) by 2030.

Potential Losses From Involuntary Rollovers

Safe harbour IRAs are designed to protect account holders by requiring notifications about their funds. However, fees and investment returns on these IRAs vary significantly.

For instance, if a person has $5,000 (£3,811) in a safe harbour IRA earning a 2% annual return, they will have amassed $11,040 (£8,415) after four decades. If the money were invested in stocks with an average annual return of 7%, the wealth could grow to $74,872 (£57,072). The stark difference in growth highlights the importance of reinvesting 401(k) rollover funds after switching jobs to avoid losing potential gains over decades.

Some workers have also reported not receiving notices about involuntary rollovers, making it difficult to track their money at times. Companies like Retirement Clearinghouse offer services to address this issue by automatically transferring small retirement accounts of departing workers into a new employer's 401(k) plan for a nominal fee. This helps workers monitor their retirement savings and ensure their funds are growing as expected within a suitable investment portfolio aligned with their goals.

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