By the end of 2021, there will be an estimated 25 million “forgotten” 401k accounts in the U.S., with an average account balance of approximately $55,000 and representing nearly $1.35 trillion of assets in total—about one-fifth of the $6.7 trillion total assets in 401k plans.
These are the key findings of a new white paper released today from New York-based fintech company Capitalize, which helps people quickly consolidate their old 401k accounts into a new or existing IRA.
The white paper, The True Cost of Forgotten 401(k) Accounts (2021), explains how these “forgotten accounts” represent 401k savings that have been left behind by people who have changed jobs or terminated employment. According to the company’s research, as of May 2021 there are an estimated 24.3 million forgotten 401k accounts in the U.S.
Over the past several months, Capitalize has analyzed a range of data sources and consulted with leading retirement policy experts, including the Center for Retirement Research, to formulate its report findings. Capitalize concluded that nearly 2.8 million 401k accounts are left behind by people who leave jobs each year, and that leaving behind a string of forgotten 401k accounts could cost an individual almost $700,000 in foregone retirement savings compared to consolidating in a single low-fee, optimally allocated retirement account.
In aggregate, the company found that these forgotten 401k accounts could be costing retirement savers $116 billion annually from higher fees and lower investment returns.
“Unfortunately, there’s a structural problem that lies at the heart of the 401k market: we change jobs every few years, which means our connection to any given 401k account is fleeting. On average, we’ll change jobs 12 times in our lives—that could mean dealing with up to 12 different 401k accounts during the course of a career,” said Gaurav Sharma, CEO at Capitalize. “At Capitalize, we’re motivated to shine a light on this problem and believe policymakers, employers and private sector institutions have a role to play in reducing the friction associated with these transition points.”
Capitalize’s data also suggests that forgotten 401k accounts have the potential to impose a burden on employers, resulting in up to $700 million in fees paid to administer forgotten 401k accounts annually.
Problem has attention of lawmakers
Solving the problem of forgotten 401k accounts and 401k “leakage”—or when participants cash out their 401ks instead of rolling them over into a new 401k at their new employer—is once again on the mind of lawmakers this year.
Bipartisan legislation that would create a national lost-and-found database to help plan participants keep track of their retirement accounts has been introduced once again, and could well end up being part of a larger SECURE 2.0 retirement reform package many expect will become law by the end of this year.
Sens. Elizabeth Warren (D-MA) and Steve Daines (R-MT) reintroduced the Retirement Savings Lost and Found Act of 2021 on May 21. The bill would create a database for retirement accounts by using data employers are already required to report to the Treasury Department. This goal is also among provisions included in a pair of companion House and Senate bills expected to form the majority of SECURE 2.0 legislation.
The problem is also being addressed by auto portability, the fairly new 401k plan default feature that automatically transfers small-balance retirement savings when participants change jobs. The DOL’s final Prohibited Transaction Exemption for auto portability in July 2019 paved the way for widespread adoption as a credible and viable solution to preserving small 401k balances and moving them forward within the defined contribution system following job separations.
The Capitalize white paper can be accessed here.
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