IAN SALISBURY for the Wall St. Journal writes: It is no secret that companies fired millions of workers during the past recession. But lately, a number of firms are handing out another kind of pink slip: booting former employees from 401(k) plans. Roughly half of companies that sponsor 401(k) plans were automatically rolling former employees with accounts holding less than $5,000, the level permitted by the government, into individual retirement accounts, or IRAs, as of 2011, according to the most recent data available from benefits consultant AonAON -4.13% Hewitt. That is up from just a third in 2005, when the tax code changed to prevent employers from cashing out workers. (They can still do that for those with less than $1,000.)
While many firms initially viewed setting up IRAs as an added hassle, the gradual accumulation of small accounts has driven up companies' administrative costs for 401(k) plans. "It's a barnacles-on-the-bottom-of-the-boat problem," said Spencer Williams, chief executive of the Retirement Clearinghouse, a specialty benefits company that has handled 350,000 such rollovers in the past five years. "As the barnacles build up, the boat has trouble moving through the water."
The moves help those savers who remain in the plans, by lowering the share of the fees that pay for back-office costs such as mailings.
For example, in a $10 million plan with an average account balance of $10,000, investors typically pay annual fees amounting to 1.44% of individual balances, according to the 401(k) Averages Book, an industry reference guide. In a similarly sized plan in which the average account balance is $50,000, fees drop to 1.2%, nearly a sixth less.
But not everyone wins, argue some critics. Those same economies of scale work against the savers who get kicked out of 401(k) plans, particularly younger employees and those who have been switching jobs frequently in an unstable economy. Outside of plans, workers typically have access only to mutual funds' more costly retail share classes, which typically charge higher fees than the institutional class provided to 401(k) investors.
Such differences in fees can amount to up to 1% of an investor's account balance each year, potentially costing them thousands of dollars in lost savings when compounded over many years.
"The 401(k) plan's buying power far outweighs what they can get in the individual market," said Patti Balthazor Björk, director of retirement research at Aon Hewitt.
What can investors do? The first step is to avoid seeing your account balances as found money and cashing out a retirement account altogether, because taxes and penalties eat up quite a bit of such withdrawals.
A better option: Roll the money (penalty free) from the IRA into your new employer's 401(k), assuming your new employer has a defined-contribution plan. That means you will again be able to benefit from economies of scale, Mr. Williams said. The IRA "is a way station," he said.
Also, people can shop around for a new IRA provider that offers lower cost funds, such as index funds.
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