Bipartisanship is a rare commodity at the moment, so it is particularly encouraging that Congress is moving toward a consensus on improving the retirement outlook for millions of Americans.
Parallel bills in the House and Senate appear on track to pass later this year or in early 2022 that will address the growing problem of abandoned or forgotten retirement savings accounts left behind at former employers. This problem is well known but turns out to be much more pervasive than previously believed.
A new comprehensive study released by retirement savings firm Capitalize reports that the amount of money stranded in forgotten 401(k), 403(b) and SIMPLE accounts is staggering. Working with data from the Department of Labor and in collaboration with the Center for Retirement Research, the study's authors estimate that 24.3 million accounts are stranded in previous employer plans totaling a whopping $1.35 trillion.
And that pot has been growing steadily, up from $790 billion in 2013. Capitalize reckons that investors in the aggregate are missing out on $116 billion in asset growth every year on average as a result. The study calculates that another 2.8 million accounts get orphaned every year.
The old days of 30 years, a pension, and a gold watch are long gone. Americans are notorious job-hoppers, changing employers 12 times on average during their working lives. With the demise of the defined benefit plan (traditional pension) for most private sector workers, the burden falls upon individuals to transfer and consolidate our retirement savings accounts as we move on to a new job.
Too often especially for smaller accounts, it's easy to put off the task until years pass and the account is forgotten, but the new data suggests this is much more common than we thought. And it's not just small accounts. The study suggests the average forgotten account balance is $55,000.
Additionally, bear in mind that abandoned 401(k) accounts continue to incur administrative and investment fees year after year, and that asset allocations are likely to become badly misallocated if not periodically rebalanced. And industry data suggests that 13% of account balances default to low-earning money market accounts, virtually guaranteeing erosion of value after fees.
When you change jobs and have a defined contribution plan like a 401(k), there are typically several options available to consolidate your account. Some employers will allow you to transfer your old employer's plan balance into your new plan.
You can also choose to roll over the account into an IRA account, or even cash out the balance subject to taxes and potential penalties (obviously the least advisable choice). But life happens, and all too often time passes and old accounts get left in the attic to gather dust.
The new data has lent additional urgency to the bipartisan efforts on Capitol Hill to address a number of looming retirement savings problems facing Americans, including the abandoned 401(k) problem. The House and Senate are each taking up a follow-on measure to the 2019 "SECURE Act", dubbed "SECURE 2.0" aimed at improving retirement security.
The measure would establish a national database of defined contribution accounts left behind at previous employers, making it much easier for Americans to find and roll over plan balances from old jobs. With nearly 10% of all retirement assets stranded in forgotten accounts, the measure is a major step forward.
SECURE 2.0 also includes other significant provisions aimed at boosting retirement security including mandating automatic enrollment in 401(k) plans, raising the age for minimum required distributions to 75, enhancing eligibility for part-time workers, and creating tax incentives for small employers to offer defined contribution plans to their employees.
Of course, you don't have to wait for a change in the law to seek out old retirement accounts. If you cannot locate a recent account statement, reach out to the HR department of your previous employer if you think you might have enrolled in their retirement plan. They should be able to help you or refer you to the custodian holding the assets to roll over to your current plan or IRA. And it is encouraging to know you won't be alone.
Christopher A. Hopkins is a chartered financial analyst (CFA) in Chattanooga.