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.
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.
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:
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?
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.
These estimates reflect detailed analysis of public and private sector data in consultation with leading policy experts:
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)s could be costing us both as individuals and the retirement savings system as a whole:
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:
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.
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%.
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.
Employers pay a price for the forgotten 401(k) phenomenon as well. This happens in three distinct ways:
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:
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.