The true cost of ‘forgotten’ 401(k) accounts: $1.65 trillion

The number of “forgotten” 401(k) plans—retirement accounts that are left behind when workers change jobs—is growing, and currently represents approximately $1.65 trillion in assets, according to a new analysis by Capitalize, a technology company that offers an online platform to help transfer 401(k) accounts.

The True Cost of Forgotten 401(k) Accounts report outlined a 20% increase in forgotten or left-behind assets in retirement plans over the past two years. The company estimated there are nearly 30 million forgotten or left-behind 401(k) accounts, and officials say that such accounts could cost an individual several hundred thousand dollars in foregone retirement savings over time.

The company noted that a surge in such forgotten accounts may be happening due to the Great Resignation, with millions of Americans switching jobs.

“We’ve seen people change jobs at elevated rates and leave their 401(k) accounts behind as they go from job to job. This reflects one of the structural problems with our 401(k) system: our retirement accounts remain tied to our employers and their 401(k) plans, leading to significant friction at the point of job change,” said Gaurav Sharma, CEO at Capitalize. “At Capitalize, we’re motivated to shine a light on this problem and work with financial institutions, policymakers, and employers to build technology that helps Americans better manage their retirement savings.”

Costs to plan holders—and plan sponsors

The report said that these forgotten accounts could be doing real harm to employees with retirement accounts. Forgotten accounts are accounts that are not managed wisely, resulting in poor asset allocation and lack of diversification. In addition, the analysis said that employees with forgotten plans could be losing money due to fees associated with the plans.

The report concluded that a badly allocated, high-fee 401(k) could result in an employee/participant missing out on several hundred thousand dollars in foregone retirement savings over 30 years.

Plan sponsors can also lose money on forgotten accounts. Sharma noted that in addition to having a fiduciary duty to plan participants, plan sponsors can incur a range of costs to administer these forgotten accounts. “Many of these costs are effectively levied on a per participant basis, so that more 401(k) accounts left behind can mean more costs for sponsors,” Sharma said. “Plan participants who have left behind their 401(k) and moved jobs are also eligible to participate in class action lawsuits against their former employers for mismanagement of the 401(k) plan – and many of them have. For this reason, plan sponsors can benefit by making sure people understand the advantages of taking their assets with them when they change jobs, while staying within the bounds of their fiduciary obligations.”

Part of the problem is that plan participants may be confused or poorly informed about their options. Sharma noted that information provided to participants who are moving to new employment and need to change or terminate accounts can be dense and legalistic. “Most plan sponsors typically outsource these communications to their recordkeepers, but there’s significant room for improvement in how the various options are communicated,” Sharma said. “We’ve seen companies and advisors do a great job conveying this directly to terminating employees. Being clear, communicating like a human, and being empathetic are what matter most.”

SECURE 2.0—the new law is a good first step, but…

Sharma also credits the recently-passed SECURE 2.0 as being a step in the right direction in addressing the problem of forgotten 401(k) plans. However, that legislation alone does not adequately address the problem, he said. “SECURE 2.0 aims to create a Lost-and-Found database for left behind retirement accounts, which will be a directory of 401(k) plan administrator contact details for savers to access.

“The database is a good start, but based on what we know, it doesn’t address some of the most difficult parts of the retirement account rollover process that savers struggle with every day,” Sharma said. “It doesn’t actually help people make an informed decision on what to do with their assets, nor does it make certain very difficult processes any easier (like rolling over those assets into a new account).”

Related: Pre-retirement ‘leakage’? Job switchers are cashing out their 401(k)s at alarming rate

For that, participants need better tools and solutions, he added. This would include more user-friendly ways to keep track of retirement accounts as workers move from job to job, simplifying the rollover process for accounts, and providing more user-friendly forms and tools at the point where workers are switching jobs.

“Helping people make a good decision at the point of job change through offboarding tools would meaningfully reduce the number of accounts that get left behind for years before being ultimately reclaimed,” the report said.