Does America need a Retirement Account “Lost and Found”? | Lord Abbett
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Retirement Perspectives

$8.5 billion has been left behind in orphaned 401(k) accounts

Read time: 3 minutes

 

Key takeaways

  • Abandoned or forgotten retirement savings accounts left behind by people changing jobs is a big problem.
  • Every effort must be taken to ensure participants aren’t squandering the retirement savings they’ve worked hard to accumulate. Unattended retirement accounts are not working for you if they are left behind.
  • There is a movement afoot in Congress to tackle this issue through the creation of a nationwide database to track these accounts.

 

Industry professionals are sounding the alarm on unclaimed retirement accounts. According to the Government Accountability Office, between 2004 and 2013, there was an eye-opening $8.5 billion sitting in lost retirement plans with just $5,000 or less in them.This amount of money in forgotten or “lost” 401(k) accounts is hard to ignore.

When tens of millions of Americans lose track of a 401(k) at an old employer, this is a huge problem, especially because they tend to change jobs often, up to twelve times during a career.2 The savings in these old accounts stagnate, leaving an opportunity toward building a secure financial future literally squandered.

 

Accounts left behind

Many Americans have left a retirement plan account behind at a past job. They may not know that they could roll it into an IRA or a new workplace plan, maybe forgot about it, or think the process is too complicated to deal with. Or had trouble tracking it down with a former employer. But the stakes are too high for hardworking Americans to leave this problem unaddressed.

 

Complexity: The root of the problem

Why do people leave their retirement savings behind? Beyond moving on with their lives and simply forgetting about their old accounts, the process to consolidate or roll over a prior Defined Contribution plan account is confusing and time consuming. People may have every good intention of following up on their money, but are stymied by the paperwork. Despite claims by some providers to the contrary, the rollover process is mostly paper-based and cumbersome, putting people off. Keeping track of retirement accounts can be overwhelming.

Under congressional scrutiny

This problem has the attention of lawmakers. A bipartisan bill to help track retirement accounts as participants move between jobs has been introduced in Congress. Senators 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.

Another effort to address this leakage is auto portability—a fairly new, 401(k) 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 adoption. Hopefully, recordkeepers will come together as a network to allow this process and help preserve and move forward small 401(k) balances within the DC system.

Consolidating accounts can help

Encouraging employees to consolidate their retirement accounts throughout their careers can also help alleviate some of this problem. Having multiple accounts is just far too unwieldy for participants.

Think about it. Leaving behind money in an old retirement account also means that savings may not be invested the way the person actually wants or needs them to be. Consolidating accounts into one central IRA or rolling them over into a current plan can help a participant ensure that every dollar is actively invested according to their needs, versus languishing in the wrong investments elsewhere.

Plus, Spencer Williams, CEO of Retirement Clearinghouse, raises an excellent point: “The more financial accounts a person has, the more likely fraud will happen,” he says.3 Consolidating retirement accounts can help reduce exposure to cybersecurity risk

What can plan sponsors do?

  • Be sure to address forgotten accounts. The Retirement Clearinghouse’s Williams says the DOL is “clearly on a path of expecting a due diligence, process-driven approach to finding missing participants. The expectation has moved to a point of having a regular program or process in place, kind of like the discipline structure of reviewing investments.” 3
  • Review the onboarding process. Plan sponsors should encourage consolidation into their plans, if rollovers are allowed, and make sure new hires become familiar with the plan provider’s system to facilitate them. While Plan Sponsor Council of America (PSCA) data shows around 96% of plans allow rollovers from other plans, only two-thirds allow rollovers from IRAs. 3
    Practice Tip:  Advisors may want to recommend that plan sponsors consider making rollovers from IRAs permissible for participants.
  • Review the exit process. When people leave your organization, don’t just hand them dense paperwork full of legalese. Try to make the process as simple as possible, enabling them to take their savings with them, if that is their choice. Remember: One plan’s terminated participant is another plan’s new hire, so plan sponsors may want to help participants who leave their plans as well as those entering their plans.

 

1 GAO-15-73, 401(k) Plans, Greater Protections Needed for Forced Transfers and Inactive Accounts, US Government Accountability Office, November 2014     

2 “Average number of jobs in a lifetime”, Zippia, May 19, 2021

3 Moore, Rebecca, “Addressing Forgotten Accounts Can Improve Retirement Savings Outcomes,” PLANSPONSOR, July 30, 2021

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, recommending to another party any transaction, arrangement, or other matter.

These materials do not purport to provide any legal, tax, or accounting advice.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

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