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The True Cost of Forgotten 401(k) Accounts (2021)

Updated on June 2, 2021

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Introduction

Key Takeaways

For many years, experts have suspected that there are a large number of ‘forgotten’ or ‘left-behind’ 401(k) accounts in the US retirement savings system.
Over the past several months, Capitalize performed the most comprehensive analysis to date of how many 401(k) accounts have been left behind by job-changers and just how much these “forgotten 401(k)s” could be costing us.
As of May 2021, we estimate that there 24.3 million forgotten 401(k)s holding approximately $1.35 trillion in assets, with another 2.8 million left behind annually.
Leaving behind a forgotten 401(k) account has the potential to cost an individual almost $700,000 in foregone retirement savings over a lifetime.
Our analysis drew on a wide range of data sources and involved consultations with leading retirement policy experts, including the Center for Retirement Research (CRR).

Our new white paper reveals an estimated 24.3 million 401(k) accounts and $1.35 trillion in assets have been left behind by job changers.

Background

If you’ve had multiple jobs in your career, you may have left behind a 401(k) when you changed employers. You’re not alone — it probably won’t surprise you to learn that there are a large number of ‘forgotten’ or ‘left-behind 401(k) accounts in the retirement savings system. These ‘forgotten accounts’ represent 401(k) savings that we’ve left behind in a former employer’s 401(k) plan when we leave that job.

But just how many of these forgotten 401(k) accounts are there? And how much money is in them? Despite plenty of anecdotal evidence that people regularly leave behind 401(k) accounts and increased legislative attention on the problem, surprisingly little work has been done to this point to rigorously estimate the magnitude of this phenomenon.

In an effort to shed light on the problem, Capitalize analyzed a range of data sources over several months and consulted with leading retirement policy experts, including the Center for Retirement Research. Our new analysis illustrates just how large the “forgotten 401(k) problem” really is and what it costs us — both as individual savers and in aggregate.

What is the forgotten 401(k) problem?

401(k)s are one of the most popular retirement savings vehicles for Americans. By the end of 2020, Americans had accumulated over $6.7 trillion in 401(k) accounts. These accounts are “employer-sponsored,” which means they’re provided by and linked to our employers — much like healthcare benefits. While 401(k) accounts are great tools for saving money in a tax-efficient way, there’s one major problem: we tend to change jobs every few years and need to decide what to do with the 401(k) savings we’ve accumulated.

We generally have a few options for those savings when we change jobs:

Roll over the 401(k) savings into an individual retirement account (IRA).
Roll over the old 401(k) into a new 401(k) account — if permitted by the new employer.
Withdraw (“cash-out”) the old 401(k) assets.
Leave the money behind in the former employer’s 401(k) plan.

Job transitions are busy times for all of us, so it’s not surprising that many of us choose the path of least resistance and leave our 401(k) account behind for some extended period of time. The result is that we can accumulate multiple 401(k) accounts as we move throughout our careers — and may end up with more than a dozen of them at the end of our working lives.

So how many accounts have been left behind, and how much money is in them?

There’s $1.35 trillion of assets and more than 24 million forgotten 401(k)s in 2021

In our latest white paper on The True Cost of Forgotten 401(k) Accounts (2021), we estimate that there are 24.3 million forgotten 401(k)s holding $1.35 trillion in assets, as of May 2021. Importantly, an additional 2.8 million accounts are left-behind by job changers each year, though some will eventually be reclaimed or liquidated.

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forgotten401ks-balances_1 — Total forgotten 401(k) accounts and assets

These estimates reflect detailed analysis of public and private sector data in consultation with leading policy experts:

24.3 million forgotten 401(k) accounts in 2021: we started our analysis with the Form 5500 documents filed with the Department of Labor by each 401(k) plan sponsor. We also reviewed additional 401(k) provider and Department of Labor data to estimate how many new accounts are forgotten annually, and GAO data to estimate how many of those accounts are transferred or liquidated each year.
Average forgotten 401(k) account balance of $55,400: we analyzed Department of Labor data to estimate national account balances and then adjusted those estimates based on summary data provided by 401(k) recordkeepers on their terminating 401(k) participants.
Our analysis here reflects extensive consultation with leading policy experts, particularly the Center for Retirement Research.
For a detailed explanation of our methodology, download our full white paper here.

Putting those numbers together — 24.3 million accounts with an average balance of $55,400 — implies that there’s approximately $1.35 trillion in forgotten 401(k)s today. Taking into account the several million accounts left behind annually, as well as increased labor market turnover from the COVID-19 pandemic, Capitalize projects that the total number of forgotten 401(k)s will continue to rise.

Forgotten 401(k) accounts could be costing us $116 billion in foregone retirement savings each year

Forgotten 401(k)s could be costing us both as individuals and the retirement savings system as a whole:

Individuals could miss out on nearly $700,000 in retirement savings throughout their lives due to the risk of a forgotten 401(k) being in a higher-fee plan and poorly allocated investments.
In aggregate, savers could be missing out on a combined $116 billion in additional retirement savings each year by leaving behind 401(k) accounts.

The two main reasons for the potential underperformance of forgotten 401(k)s are the risk of higher fees and, more importantly, the risk of forgotten 401(k) savings being left behind in low-return investments.

First, even though many savers don’t realize it, 401(k) accounts provided by employers typically incur ongoing fees. Those 401(k) fees tend to fall into two main categories:

Individual investment fees: fees paid for investments in ETFs and mutual funds. These are known as “expense ratios.” Some ETFs and mutual funds have higher expense ratios than others, meaning participants pay more to invest in them. These fees are paid in all investment accounts – whether those accounts are 401(k)s, IRAs, or brokerage accounts.
Administrative and other fees charged by the 401(k) provider: these fees are paid to offset the cost of administering the plan. They can be paid by either employers or employees, or the cost can be shared between them. A major type of administrative fee is known as a “recordkeeping fee.” Other fees charged by the 401(k) provider may include the cost of advising employers on which investments to include in the plan and a cost for advising individual participants.

According to Investment Company Institute (ICI) data from 2020, the median 401(k) fee was 0.85% of assets per year, while the 90th percentile was almost 1.5% per year. While not all of these fees will be passed along to individual savers in the 401(k) plan, a substantial portion will be.

Thankfully, 401(k) fees have been declining in recent years, and the 10th percentile fee is only 0.41%. The problem is, however, that there remains huge variance in 401(k) plan fees — that is, there’s a big gap between the highest fee 401(k) plans and low-fee 401(k) plans. There’s also a big gap between high-fee plans and the all-in costs of a low-fee IRA like an automated or robo-advisor IRA which range between 0.20% and 0.40%.

Unfortunately, a recent survey found that 73% of people didn’t know how much they paid in fees for their 401(k). The risk is, therefore, that an individual’s forgotten 401(k) account is stuck in a high-fee plan and they don’t know about it.

To illustrate the impact this can have, consider two accounts starting with $55,000 and returning 9.2% annually; one account charges 0.85% annual fees, the other only 0.40% (in line with a 10th percentile fee 401(k) plan or a competitive robo-advisor IRA). Over 30 years, that would lead to a $90,000 difference in total account balance.

forgotten-401k-fees_1 — Annual account fees as a percentage of assets

While plenty of 401(k) plans have appropriate and competitive fees, our analysis is meant to highlight the risks to savers if their forgotten 401(k) happens to be in a high-fee plan where all fees have been passed-along – unfortunately, this still happens to be the case for too many participants today.

Ultimately, though, the larger potential driver of foregone savings in a forgotten 401(k) comes from poor “asset allocation” – that is, those savings being in the wrong investment. More specifically, the biggest risk is that a forgotten 401(k) account is left behind in a low-return instrument like a Money Market Mutual fund rather than a diversified, higher-return portfolio.

Unfortunately, this risk isn’t just theoretical. Between 2010 and 2019, an average of 13% of 401(k) plans defaulted to either a Money Market Mutual Fund or similar Stable Value Fund. Typical money market mutual fund returns are below 1%, while a Stable Value Fund might deliver a modestly better 2-3%.

On the other hand, a well-allocated, diversified retirement account should generate meaningfully better returns over time. That diversified portfolio might come from a “managed” 401(k) account, a sensible portfolio created by the individual, or from an automated IRA created by a robo-advisor. Those accounts have returned almost 9% annually over the past three years. More broadly, popular S&P 500 ETFs have seen 10 year annualized returns of nearly 14%.

forgotten-401k-returns_1 — Average annual account returns by asset allocation

In other words, a poorly allocated forgotten 401(k) account could mean significant foregone returns that are only exaggerated by the power of compounding. Consider an account with a $55,000 balance again: a well-allocated account could deliver over $5,000 in returns compared to only $550 for a Money Market Mutual fund in a single year. Even if a 401(k) started off being well-allocated, those investment allocations need to be regularly monitored and updated over time — and the chances of that happening decline the longer a 401(k) account remains forgotten.

For an individual, a well-allocated, modest fee account could yield nearly $700,000 more to use towards retirement over 30 years than a forgotten 401(k) stuck in a low-return investment — or about 13x more than a poorly allocated account. To put $700,000 into perspective: the USDA estimates raising a child to age 17 on average costs $233,610.

In aggregate, those 24.3 million forgotten accounts with $55,000 balances could be missing out on an additional $116 billion in retirement savings growth each year.

forgotten-401k-cost-return-graph_1 — Impact of asset allocation and account fees over the life of a retirement account (based on a $55K starting balance over 30 years)

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The burden on employers: up to $700 million in extra administrative costs each year

Employers pay a price for the forgotten 401(k) phenomenon as well. This happens in three distinct ways:

Employers pay more annual administrative or recordkeeping fees. While employers pass on some of the costs of providing 401(k) plans, they retain some of them. In particular, employers are likely to pay a meaningful portion of administrative or recordkeeping fees. Our analysis suggests that employers are paying up to $700 million in extra administrative fees for the forgotten 401(k) accounts of former employees. That’s because many of these fees are levied on a “per participant” basis, and a former employee who forgets an active 401(k) behind will count as a “participant.” Our analysis takes into account the variation in recordkeeping costs per participant depending on plan size, and that employers will retain only some of these costs.
Employers take on increased legal risk. Employers who provide a 401(k) plan are increasingly exposed to legal risks under ERISA as a result of their fiduciary duty. This means they can be sued by plan participants for alleged breaches of that duty. In 2020, there were over 200 such class-action lawsuits — more than twice the number of such suits filed in 2018. The cost of these lawsuits can be significant — a plan with 500 participants might end up paying close to $2,500 per participant in a settlement, or about $1.25 million. Since holders of forgotten 401(k) accounts are technically “participants” in the plan, they are able to participate in these lawsuits.
Employers use valuable HR and administrative time to manage forgotten 401(k) accounts. When employees move on from their jobs but leave their 401(k)s behind, the employer still has significant obligations to maintain their retirement account. This includes ensuring ERISA requirements are met by communicating plan details annually and responding to former employee inquiries regarding their old plan. These are real and meaningful additions to the direct per participant costs incurred by an employer for forgotten 401(k) accounts. What’s worse, this effort diverts resources that could be invested in improving benefits for current or prospective employees.

Fixing the problem: a responsibility for policy makers, employers, and innovators

The forgotten 401(k) problem is a large, expensive feature of the modern retirement savings market — for individuals, employers, and the system as a whole. Unfortunately, it’s driven by the reality that retirement benefits have become something we expect from the employer. As we continue to switch jobs at a rapid pace, the risk of us leaving behind 401(k) accounts with meaningful balances in them also increases. These forgotten 401(k) accounts might be stuck in high-fee 401(k) plans or be left in low-return investments — the combination of which can lead to significant foregone savings.

At Capitalize, we believe the responsibility for solving the problem rests with multiple stakeholders — including private sector institutions. In particular, we believe that several key initiatives can meaningfully reduce the prevalence and cost of forgotten 401(k) accounts:

Make it easier to locate old 401(k) accounts: there is currently no national database for lost-and-found 401(k) accounts, despite Congressional proposals in the past. Senators raised this idea again in May 2021, though it remains to be seen if it will pass into law.
Simplify the rollover process: We’ve written before on the outdated nature of the current 401(k) rollover process and we’re passionate about modernizing it. Making it easier for employees to roll over their accounts at the point of job change into another 401(k) or an IRA would dramatically reduce the number of forgotten 401(k) accounts.
Provide terminated employees with user-friendly tools, not legalese and paperwork: Many employers meet their legal obligation to give terminating employees some information on their options. Unfortunately, that information is often dense and full of jargon — and as a result, it’s frequently ignored. Giving users modern tools to move their money or understand their options is much more likely to lead to informed decisions and fewer forgotten 401(k) accounts.

By shining a light on the size and cost of the problem, we hope to encourage people to focus on one of the largest and most under-appreciated reasons for why retirement savings in America are not what they should be.