401(k) Plans at Risk of Being Forgotten
As job mobility increases among Americans, a lot of individuals are at risk of neglecting their 401(k) plans from previous employers, a recent study reveals.
In 2023, there are approximately 29.2 million unclaimed 401(k) accounts, which marks a 20% increase from two years ago, according to a fintech report.
A report from 2024 suggests that nearly half of employees don’t transfer their funds and leave them in old plans as they change jobs.
This oversight can result in financial penalties.
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Interestingly, about 41% of workers are unaware that they’re incurring fees associated with their 401(k) plans, as per a 2021 survey conducted by the U.S. government’s accountability office.
In general, the management costs for 401(k) accounts can vary but are often quite minimal depending on the plan provider. Yet, past employment can lead to extra fees that further eat into retirement savings.
Cost of Neglected 401(k) Accounts
Romi Savova, CEO of Pensionbee, an online retirement platform, points out that former employees might incur additional charges for leaving their 401(k) accounts inactive. She notes that employers may impose record-keeping fees on these dormant accounts.
Pensionbee’s examination indicates that maintaining these accounts can cost around $4.55 monthly, adding up to a potential loss of $18,000 in retirement savings over time, factoring in lost growth.
Gilbaumgarten, CEO of Segment Wealth Management in Houston, has expressed that the fees associated with forgotten 401(k)s can be particularly harmful for those saving for a long time.
However, he also mentions that transferring balances doesn’t always guarantee better outcomes.
“There are two sides to every situation,” he notes. “While a forgotten 401(k) poses challenges, rolling it into an IRA might come with its own set of costs.”
Managing Old 401(k) Accounts
When people switch jobs, they have the option to transfer their funds into a new employer’s 401(k) or roll them into an IRA. A significant number of individuals tend to do just that.
However, it’s worth noting that IRAs often carry higher investment fees compared to 401(k)s, which can add up over time, as pointed out by various studies. Pew Charitable Trusts estimates that workers rolling funds into IRAs could collectively pay an extra $45.5 billion in fees over a hypothetical 25-year retirement period.
Another choice is to cash out the old 401(k), but this option is generally discouraged because of tax penalties. Still, according to Vanguard, about 33% of workers resort to this route.
Locating Your Forgotten 401(k)
Leaving funds in previous employer plans might seem easier, but tracking down these old accounts can be a challenge.
Current data shows that approximately 25% of all 401(k) assets are left unclaimed or forgotten, increasing from previous years.
Fortunately, the Secure 2.0 legislation is implementing measures to enhance retirement savings tracking, such as the Labor Department’s new database aimed at reuniting workers with lost retirement accounts.
Individuals can also utilize options like the National Registration of Unclaimed Retirement Benefits, which is a database for identifying lost retirement savings.
In 2022, a coalition of 401(k) providers established the Portability Services Network.
This collaboration is geared toward streamlining the rollover process for defined contribution plans, allowing employees to automatically transfer savings up to $7,000 to a retirement account with their new employer when changing jobs, depending on the specific plan.
The idea is to consolidate retirement savings and prevent losses during job transitions, according to Mike Shamrell, a key figure in the Portability Services Network.
