Key Takeaways
- • PensionBee research released Oct. 21 found 68% of accounts transferred into automatic rollover IRAs lost value within their first year, according to CEO Romi Savova.
- • Of automatic rollover IRAs still open after eight years, 39.4% were worth less than when established, while 52% remained open after eight years.
- • Savova urged plan sponsors to run formal RFP or RFI processes, scrutinize fees, and reconsider provider selection rather than defaulting to the record keeper's integrated provider.
- • Fees of $50 to $100 opening and $1 to $5 monthly could consume more than 13% of a $1,200 balance in year one, per the report.
- • Savova called for regulatory changes permitting target-date funds as default investments in automatic rollover IRAs.
Summary
PensionBee CEO Romi Savova is urging retirement plan sponsors to reevaluate their automatic rollover IRA providers and to improve communications with departing employees. Research released by PensionBee on Oct. 21, using data analyzed by the Employee Benefit Research Institute (EBRI), found that 68% of accounts transferred into automatic rollover IRAs lost value within their first year. The analysis also showed that 52% of automatic rollover IRAs remained open after eight years, and 39.4% of those still-open accounts were worth less than when they were established. The research analyzed rollover accounts initially holding less than $5,000, using EBRI data from 2010 through 2023, across databases covering between 9 million and more than 20 million accounts a year. PensionBee, which offers automatic rollover IRAs, said the findings highlight the need to reconsider a system designed for short-term account transfers.
Under federal rules, employers can generally move former employees' balances of more than $1,000 and up to $7,000 into an IRA without affirmative consent, reducing the administrative burden of maintaining small accounts. Savova cautioned against simply selecting providers integrated with a plan's existing record keeper, recommending formal request-for-proposal or request-for-information processes that compare investments, fees and participant services, with documented selection decisions. She said sponsors should also assess whether providers make it easy for former employees to locate accounts, access balances and transfer savings.
Savova emphasized that the long duration of open accounts should shape investment decisions. Although automatic rollover IRAs must meet capital-preservation requirements, she noted that an account earning 0.5% annually could produce substantially different results over eight years than one invested in Treasury securities yielding 3% to 4%. She said sponsors must now think about compounding within these products in ways they are accustomed to with 401(k) plans but have not historically applied to automatic rollover IRAs.
The report identified opening fees of $50 to $100 and monthly charges of $1 to $5. According to the analysis, a $100 opening fee combined with $5 monthly charges would consume more than 13% of a $1,200 balance in the first year. Savova also called for regulatory changes allowing target-date funds as default investments in automatic rollover IRAs, arguing that capital-preservation rules do not reflect how long these accounts remain open.
Savova urged employers to prioritize communications when workers leave, saying "Offboarding is the new onboarding when it comes to communication." She recommended explaining distribution and rollover options before departure, rather than relying exclusively on required disclosures. Previous PensionBee research found that employees who received no explanation of their retirement options at departure were more than four times as likely to lose track of their 401(k) accounts as those receiving clear information.
Under federal rules, employers can generally move former employees' balances of more than $1,000 and up to $7,000 into an IRA without affirmative consent, reducing the administrative burden of maintaining small accounts. Savova cautioned against simply selecting providers integrated with a plan's existing record keeper, recommending formal request-for-proposal or request-for-information processes that compare investments, fees and participant services, with documented selection decisions. She said sponsors should also assess whether providers make it easy for former employees to locate accounts, access balances and transfer savings.
Savova emphasized that the long duration of open accounts should shape investment decisions. Although automatic rollover IRAs must meet capital-preservation requirements, she noted that an account earning 0.5% annually could produce substantially different results over eight years than one invested in Treasury securities yielding 3% to 4%. She said sponsors must now think about compounding within these products in ways they are accustomed to with 401(k) plans but have not historically applied to automatic rollover IRAs.
The report identified opening fees of $50 to $100 and monthly charges of $1 to $5. According to the analysis, a $100 opening fee combined with $5 monthly charges would consume more than 13% of a $1,200 balance in the first year. Savova also called for regulatory changes allowing target-date funds as default investments in automatic rollover IRAs, arguing that capital-preservation rules do not reflect how long these accounts remain open.
Savova urged employers to prioritize communications when workers leave, saying "Offboarding is the new onboarding when it comes to communication." She recommended explaining distribution and rollover options before departure, rather than relying exclusively on required disclosures. Previous PensionBee research found that employees who received no explanation of their retirement options at departure were more than four times as likely to lose track of their 401(k) accounts as those receiving clear information.
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