'Forgotten' 401(k)s cost employers as well as their former employees
In aggregate, savers could be missing out on a combined $116 billion in additional retirement savings each year by leaving behind 401(k) accounts.
Changing jobs can carry a steep price. Employees have left behind an estimated 24.3 million 401(k) accounts valued at $1.35 trillion, according to a new white paper from Capitalize. Leaving behind a forgotten 401(k) account has the potential to cost an individual almost $700,000 in foregone retirement savings over a lifetime.
In aggregate, this means that savers could be missing out on $116 billion of additional retirement savings growth each year.
“If you’ve had multiple jobs in your career, you may have left behind a 401(k) when you changed employers,” the report said.
“You’re not alone — it probably won’t surprise you to learn that there are a large number of ‘forgotten’ or ‘left-behind’ 401(k) accounts in the retirement savings system. These forgotten accounts represent 401(k) savings that we’ve left behind in a former employer’s 401(k) plan when we leave that job.”
Capitalize analyzed a range of data sources over several months and consulted with leading retirement policy experts, including the Center for Retirement Research.
It found that forgotten 401(k)s could be costing both individuals and the retirement savings system as a whole:
- Individuals could miss out on nearly $700,000 in retirement savings throughout their lives due to the risk of a forgotten 401(k) being in a higher-fee plan and poorly allocated investments.
- In aggregate, savers could be missing out on a combined $116 billion in additional retirement savings each year by leaving behind 401(k) accounts.
The two main reasons for the potential underperformance of forgotten 401(k)s are the risk of higher fees and, more importantly, the risk of forgotten 401(k) savings being left behind in low-return investments.
Even though many savers don’t realize it, 401(k) accounts provided by employers typically incur ongoing fees. Those fees tend to fall into two main categories: individual investment fees, and administrative and other fees charged by the 401(k) provider.
For an individual, a well-allocated, modest-fee account could yield nearly $700,000 more to use toward retirement over 30 years than a forgotten 401(k) stuck in a low-return investment, or about 13 times more than a poorly allocated account.
Employers also play a price through annual administrative or recordkeeping fees, increased legal risk and valuable HR and administrative time.
The report places responsibility for solving the problem with multiple stakeholders, including private sector-institutions. Several initiatives can meaningfully reduce the prevalence and cost of forgotten 401(k) accounts:
Make it easier to locate old accounts. There currently is no national database for lost-and-found 401(k) accounts, despite congressional proposals in the past. Congress raised this idea again in May, although it remains to be seen if it will pass into law.
Simplify the rollover process. Making it easier for employees to roll over their accounts at the point of job change into another 401(k) or an IRA would dramatically reduce the number of forgotten accounts.
Provide terminated employees with user-friendly tools, not legalese and paperwork. Many employers meet their legal obligation to give terminating employees some information on their options. Unfortunately, that information is often dense and full of jargon, and as a result, it’s frequently ignored. Giving users modern tools to move their money or understand their options is much more likely to lead to informed decisions and fewer forgotten accounts.
“By shining a light on the size and cost of the problem, we hope to encourage people to focus on one of the largest and most underappreciated reasons for why retirement savings in America are not what they should be,” the report concluded.
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