Many Americans are leaving behind their 401(k) retirement accounts with previous employers when transitioning jobs, according to new research, potentially forgetting hundreds of thousands of dollars in savings they could tap in their golden years.
Workers have forgotten about 24.3 million 401(k) accounts worth $1.35 trillion, as of May 2021.
On a per-person scale, each account carries a $55,000 average balance that over the course of an entire career could add up to almost $700,000 in foregone retirement savings, according to Capitalize, using data from the Center for Retirement Research, the Department of Labor, and policy experts.
“The implications of this for the individual is significant and the implications for the system as a whole are also significant,” Gaurav Sharma, CEO and co-founder of Capitalize, a platform that helps users rollover retirement accounts, told Yahoo Money. “To put that in perspective, [that] is multiples more than the median house price in the U.S. and multiples more than what it costs to raise a child in the U.S.”
The long-term outlook for left-behind 401(k)s is poised to become even more tangled as millennials — the country’s largest generation — are expected to change jobs up to 12 times throughout the course of their careers.
There are a “couple of reasons” why people leave behind old 401(k)s and much of it has to do with an outdated and clunky system that creates “administrative hurdles.”
“It's confusing what the right thing to do is,” Sharma said. “There’s no user-friendly information that clearly explains what they can or should do when they change jobs.”
What Sharma describes as the “cumbersome and old school” process of rolling over retirement savings has remained relatively unchanged since the 1980s. The legwork entails emailing your former employer’s human resources department, calling the 401(k) provider, and returning notarized paperwork usually by fax or mail. The time between the initial request and mailed paper check could take months, he said.
As more time passes, the hurdles to securing your money only grow taller. It's not uncommon for users to need to recall out-of-date login credentials and that’s assuming their old employer hasn’t changed 401(k) providers, Sharma added.
Faced with those headwinds, roughly 3 million Americans a year leave money behind because it’s the “path of least resistance,” he said.
Financial waste is also happening on the other side of the equation, Sharma explained. “There's also a burden on the employer,” he said, sharing that employers pay about $700 million to administer old 401(k)s while burning up human resources and administrative bandwidth because employers still carry the obligation of maintaining retirement accounts.
So where does the money go? It depends on the balance.
If the account holds between $1,000 and $5,000, the employer can move a former worker's money into an IRA of their choosing, or what's known as a forced rollover. The funds are typically invested in a money market mutual fund, a notoriously low-return instrument, costing account holders better returns.
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For balances greater than $5,000, money “cannot be forced out and it can technically stay in the 401(k) plan,” Sharma said. But if the money isn’t actively managed by the owner, the opportunity for high growth and returns diminishes.
“You’ve earned and saved this money,” Sharma said. “Make the most of it when you change jobs, don't leave it behind.
For those with old, forgotten 401(k)s, “it's probably a good idea for you to find them and consolidate them," he said.