401k Accounts Left Behind – Ask Erick

Q: Hey Erick, we are looking forward to seeing the U.S. Department of Labor’s (DOL’s)efforts to help savers locate left-behind or forgotten 401(k) accounts by creating a national search database. Are there any statistics that shed light on the magnitude of this problem in the retirement plans industry? – Annie in Accounting.

A: Hi Annie!  Many job switchers leave their 401(k) behind to deal with later. The result is that they can end up with a string of 401(k) accounts tied to former employers, each with different fees, asset allocations, and custodians. This is something that I am constantly working on for my clients. Not only can there be fees for the employee but fees for the business too as well as potential liability in participant communication. Remember, those former employees must be given the same communication as your current employees. Yes, even those that are hard to find. You must show effort to provide them the same annual notices, etc.

In an updated version of its 2021 white paper, “The True Cost of Forgotten 401(k) Accounts,” Capitalize found forgotten accounts have grown by 20% in the last two years. As of May 2023, there are an estimated 29.2 million forgotten or left-behind 401(k) accounts in the United States, representing $1.65 trillion in assets. Capitalize research attributes the growth to last year’s “Great Resignation” push and raised rates of job switching. The average account balance of a forgotten 401(k) increased to $56,616 from $55,400, and in aggregate, the  assets left behind by job changers now represent close to 25% of the total savings in 401(k) plans.

I do have some strategies to address this issue for my clients so reach out and I’ll share what I’m doing.

What Are Your Options for an Old 401(k) When You Change Jobs?

There are generally four options. You may be able to leave the money in your former employer’s plan, if the plan allows it. You may be able to roll it into your new employer’s plan, if that plan accepts rollovers. You can roll it into an individual retirement account (IRA). Or you can cash it out, which typically means income taxes, mandatory withholding, and a possible 10% early withdrawal penalty if you are under age 59½. Each option differs in fees, investment choices, services, and legal protections, so compare them carefully. For employers, former employees who keep balances in the plan must continue to receive required notices.

Retirement Partners of California helps employers educate departing employees about their choices. Consult your plan administrator, tax professional, or advisor before making a decision.