If you quit a job, got fired, or were let go over the past few years during the pandemic you may own one of the millions of forgotten 401(k)s holding more than $1 trillion in assets.
Help is coming, though, to reunite you with those funds.
In the final weeks of 2022, Congress passed Secure Act 2.0, which, among other things, promises to establish a national lost-and-found database for lost retirement accounts by 2025.
Large swings in the jobs market over the last few years provided ample opportunity for workers to lose retirement accounts. Business shutdowns at the onset of the pandemic forced 23 million people out of work, the highest number since the government started tracking that data. When the economy reopened, a strong and fast recovery sparked labor shortages that drove a record 4.5 million employees to quit their jobs in November 2021 for higher pay or more fulfilling work amid the stress of the health crisis.
If the new law helps Americans track down those abandoned 401(k)s, it “has the ability to make a meaningful dent and meaningful improvement in the national savings gap,” said Greg Long, head of public policy at Alight Solutions, a technology and consulting firm specializing in human resources tools.
What is a 401(k)?
A 401(k) is an employer-sponsored retirement plan. Not all companies offer them, but most large ones do, deducting contributions from paychecks and investing the money in financial markets to help employees build a nest egg. Contributions up to a certain amount are tax-advantaged and companies can also match a percentage of a worker’s contributions.
While there are other ways for workers to save for retirement, like IRAs and pensions, 401(k)s represent nearly one-fifth of the $37.2 trillion U.S. retirement market, which is why supporters of the law’s lost-and-found provision think it’s so critical to shoring up the nation’s shortfall in savings.
In 2020, there were about 600,000 plans, with about 60 million active participants and millions of former employees and retirees, according to industry data. As of June 20, 2021, those accounts held an estimated $7.3 trillion in stocks, bonds, cash and other assets.
How many people leave their 401(k)s when they leave a job and how much does that cost?
As of May 2021, there were 24.3 million forgotten 401(k)s holding approximately $1.35 trillion in assets, with 2.8 million more left behind each year by people leaving jobs, according to estimates fromCapitalize, a financial services firm specializing in 401(k)s.
“Leaving behind a forgotten 401(k) account has the potential to cost an individual almost $700,000 in foregone retirement savings over a lifetime,” Capitalize said.
What happens to forgotten 401(k)s?
Under the Economic Growth and Tax Relief Reconciliation Act of 2001, companies can roll over forgotten accounts with balances between $1,000 and $5,000 into an IRA.
The problem with that is “those accounts sit and decay,” said Long of Alight Solutions. The IRAs basically invest in cash or money market accounts, which are the safest assets but offer the smallest returns, so the fees charged often exceed any gains the accounts earn. “This is bad for participants and for the industry.”
If those accounts had stayed invested, they would have accumulated an additional $1.51 trillion over 40 years, adjusted for inflation, the Employee Benefit Research Institute said in a 2019 study. The nonpartisan, tax-exempt research group estimated that people between 25 and 34 years old would have accumulated an additional $659 billion for retirement.
How would a national lost and found database help?
Though not yet developed, the database run by the Department of Labor would likely allow people to use their birthdate, name and Social Security number to check if they have any forgotten retirement funds. If they do, they’ll get information on where the money is and whom to contact to access it. They can then arrange for the money to be transferred.
“A searchable online database makes it much, much easier to find and contact plan sponsors,” of 401(k)s, said David Stinnett, head of Vanguard’s strategic retirement consulting.
Currently, people must track down and contact the human resources department of a company they worked for or the plan’s administrator and ask about their 401(k)s, he said. That task can be complicated if the company went through a merger, bankruptcy, name change or switched location.
Similarly, employers will be able to use the database to find former employees with forgotten accounts and alert them.
“Every year there are employers around the country ready to pay benefits to retirees, but they are unable to find the retirees because the former employees changed their names or addresses,” Sen. Elizabeth Warren, D-Massachusetts, said in December.
The database isn’t slated until 2025, what can people do now?
Other than hunting down contact information for your former company or the current plan administrator, there’s not much people can do to find their retirement accounts.
However, later this year Vanguard and Fidelity plan to launch a so-called “auto-portability program” that allows them to find owners of lost plans of less than $5,000 that they oversee and automatically transfer the funds to their owners.
Vanguard and Fidelity joined Alight Solutions and Retirement Clearinghouse to create Portability Services Network, which will continue to add more plan administrators to the network so more people can be found and automatically reunited with their forgotten funds. Alight has already launched its program, but it remains small. When Fidelity and Vanguard join, though, the three companies together will hold records for about 40% of retirement accounts in America, Long said.
How does auto-portability work?
If Vanguard sees you have a forgotten account in their records, it will periodically search for you, Stinnett said. If it finds you, it will notify you. After some time if you don’t instruct Vanguard on what to do with the money, Vanguard will automatically transfer the money to your current 401(k) in the allocations you’ve chosen for that account.
Stinnett emphasized that thisonly applies to accounts of less than $5,000. There are still people with larger lost accounts or pension plans instead of 401(k)s, which the national lost-and-found database will help.
“The lost-and-found registry is a different way to address a similar problem,” Long said. “It provides information to help participants find out who has your money but doesn’t help move the money. The database is a backstop for anything that’s not solved with auto-portability.”
