Secure 2.0 Act: A Potential Impact on Low Balance Retirement Accounts

Individuals with low balance 401(k)s and similar retirement plans may face a significant change in 2024. The Secure 2.0 retirement act provisions are set to raise the threshold for automatic rollovers from the current limit of balances between $1,001 and $5,000 to a new limit of $7,000. This alteration could potentially impact an additional 800,000 workers and may inadvertently lead to diminished account balances due to high fees and low yields linked with the Individual Retirement Accounts (IRAs) that the funds are transferred into.

Increasing the Threshold: A Double-Edged Sword

The Secure 2.0 retirement act aims to introduce major reforms to retirement planning, with one of the key changes being an increase in the threshold for automatic rollovers of inactive retirement accounts. While this move is designed to help secure retirement funds, it could inadvertently expose more workers to the risks associated with involuntary rollovers. Particularly vulnerable are younger employees who frequently change jobs, leaving behind small balance retirement accounts that can be forgotten over time, and hence caught in the rollover net.

The Downside of Involuntary Rollovers

IRAs, into which the automatically rolled over funds are transferred, often carry high fees and offer low returns. This can result in the erosion of hard-earned savings, especially for those with smaller balances. According to the Retirement Clearinghouse CEO Spencer Williams, more than $1.5 trillion could be lost due to this inefficient system. Furthermore, workers younger than 59 and a half, who cash out accounts worth less than $1,000, may also face income taxes and a 10% early withdrawal penalty.

Addressing The Issue: The Retirement Savings Lost and Found Act

Efforts to confront these challenges include the proposed Retirement Savings Lost and Found Act, which is part of the Secure 2.0 Act. This provision mandates the Department of Labor to create a database to help individuals track down forgotten retirement accounts, ensuring that every dollar saved towards retirement is utilized effectively. The Act may also include provisions for emergency withdrawals, new employer contribution options, and a new match for student loan payments, all aimed at fortifying the financial security of American workers.