The High Cost of 'Forgotten' 401(k)s

When people leave their jobs, as most Americans do several times in their careers, they sometimes leave their 401(k) accounts behind.

How big a problem is this in terms of the number of accounts forgotten and the amount of money in them?

A new white paper from Capitalize, a platform to transfer retirement assets, concludes that employees leave behind some 2.8 million accounts each year when they change jobs.

The paper estimates that as of May, there were 24.3 million forgotten 401(k) accounts in the U.S., and that the number will rise to nearly 25 million accounts by year-end.

Each account will hold about $55,000 on average, amounting to some $1.4 trillion of assets in total, according to Capitalize.

Over a lifetime, a forgotten 401(k) account could cost a person around $700,000 in forgone retirement savings, the research found. In aggregate, employees could be missing out on $116 billion of additional retirement savings growth each year.

In addition, forgotten 401(k) accounts could burden employers with up to $700 million in fees paid to administer forgotten 401(k) accounts annually, according to the Capitalize data.

In fiscal 2020 alone, investigators from the Labor Department's Employee Benefits Security Administration helped missing and nonresponsive participants recover benefits with a present value of more than $1.4 billion.

Capitalize tapped a variety of data sources and consulted retirement experts, including the Center for Retirement Research, for its analysis.

"Unfortunately, there's a structural problem that lies at the heart of the 401(k) market: we change jobs every few years, which means our connection to any given 401(k) account is fleeting," Gaurav Sharma, Capitalize's chief executive, said in a statement.

"On average, we'll change jobs twelve times in our lives — that could mean dealing with up to 12 different 401(k) accounts during the course of a career."

Fixing the Problem

The white paper says responsibility for solving the forgotten accounts problem lies with multiple stakeholders, including private institutions. It suggests several key initiatives that can meaningfully reduce the prevalence and cost of forgotten 401(k) accounts:

Make it easier to locate old 401(k) accounts.
Make it easier for employees to roll over their accounts when they change jobs.
Provide terminated employees with user-friendly tools, not legalese and paperwork.

On Capitol Hill, Sens. Elizabeth Warren (D–Mass.) and Steve Daines (R–Mont.) last month reintroduced the Retirement Savings Lost and Found Act of 2021 in an effort to reduce the number of people missing out on their savings.

In January, the Labor Department issued guidance to help fiduciaries locate and distribute benefits to missing or nonresponsive participants.

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