If you quit your job, were fired, or were laid off during the pandemic, you may have one of the millions of forgotten 401(k)s with more than $1 trillion in assets.
However, assistance is on the way to re-unite you with those funds.
In the final weeks of 2022, Congress passed Secure Act 2.0, which promises to establish a national lost-and-found database for lost retirement accounts by 2025, among other things.
Large swings in the job market in recent years have given workers ample opportunity to lose retirement accounts. Business closures at the start of the pandemic forced 23 million people out of work, the most since the government began tracking that data. When the economy reopened, a strong and rapid recovery created labour shortages, prompting a record 4.5 million employees to leave their jobs in November 2021 for higher pay or more fulfilling work, despite the stress of the health crisis.
If the new law assists Americans in locating lost 401(k)s, it “has the potential to make a meaningful dent and meaningful improvement in the national savings gap,” according to Greg Long, head of public policy at Alight Solutions, a technology and consulting firm specialising in human resources tools.
What exactly is a 401(k)?
A 401(k) is a retirement plan offered by an employer. Not all companies provide them, but most large ones do, deducting contributions from employees’ paychecks and investing the funds in financial markets to assist employees in saving for retirement. Contributions up to a certain amount are tax-deductible, and employers can match a percentage of their employees’ contributions.
While there are other ways for employees to save for retirement, such as IRAs and pensions, 401(k)s account for nearly one-fifth of the $37.2 trillion U.S. retirement market, which is why supporters of the law’s lost-and-found provision believe it is critical to filling the country’s savings gap.
According to industry data, there will be approximately 600,000 plans in 2020, with approximately 60 million active participants and millions of former employees and retirees. These accounts held an estimated $7.3 trillion in stocks, bonds, cash, and other assets as of June 20, 2021.
How many people leave their 401(k)s when they leave a job, and what is the cost of doing so?
According to estimates from Capitalize, a financial services firm specialising in 401(k)s, there were 24.3 million forgotten 401(k)s with approximately $1.35 trillion in assets as of May 2021, with 2.8 million more left behind each year by people leaving jobs.
“Over a lifetime, leaving behind a forgotten 401(k) account has the potential to cost an individual nearly $700,000 in foregone retirement savings,” Capitalize said.
What happens to 401(k)s that are forgotten?
Companies can roll over forgotten accounts with balances between $1,000 and $5,000 into an IRA under the Economic Growth and Tax Relief Reconciliation Act of 2001.
The issue is that “those accounts sit and decay,” according to Long of Alight Solutions. IRAs primarily invest in cash or money market accounts, which are the safest assets but offer the lowest returns, so the fees charged frequently exceed any gains earned by the accounts. “This is detrimental to both participants and the industry.”
If those accounts had remained invested, they would have accumulated an additional $1.51 trillion over 40 years, adjusted for inflation, according to a 2019 study by the Employee Benefit Research Institute. According to the nonpartisan, tax-exempt research organisation, people between the ages of 25 and 34 would have saved an additional $659 billion for retirement.
How would a national lost and found database be beneficial?
Though not yet completed, the Department of Labor’s database would most likely allow people to use their birthdates, names, and Social Security numbers to see if they have any unclaimed retirement funds. If they do, they will be given information on where the money is and who to contact in order to obtain it. They can then make arrangements for the funds to be transferred.
According to David Stinnett, head of Vanguard’s strategic retirement consulting, “a searchable online database makes it much, much easier to find and contact plan sponsors” of 401(k)s.
For the time being, people must locate and contact the human resources department of a company they previously worked for or the plan’s administrator to inquire about their 401(k)s, he said. This task may become more difficult if the company has undergone a merger, bankruptcy, name change, or relocation.
Similarly, employers will be able to use the database to locate and notify former employees who have forgotten their passwords.
“Every year, employers across the country are ready to pay retiree benefits, but they are unable to find the retirees because the former employees changed their names or addresses,” said Sen. Elizabeth Warren, D-Mass., in December.
What can people do now that the database isn’t expected to be completed until 2025?
There isn’t much people can do to find their retirement accounts other than looking up contact information for their former employer or the current plan administrator.
However, Vanguard and Fidelity plan to launch a “auto-portability programme” later this year that will allow them to find owners of lost plans worth less than $5,000 that they oversee and automatically transfer the funds to their owners.
Vanguard and Fidelity joined forces with Alight Solutions and Retirement Clearinghouse to form the Portability Services Network, which will continue to add plan administrators to the network so that more people can be found and automatically reunited with their misplaced funds. Alight has already begun its programme, but it is still in its early stages. When Fidelity and Vanguard merge, the three companies will hold records for roughly 40% of retirement accounts in America, according to Long.
How does auto-portability function?
If Vanguard discovers a forgotten account in its records, it will search for you on a regular basis, according to Stinnett. It will notify you if it finds you. If you do not instruct Vanguard on what to do with the money after a certain period of time, Vanguard will automatically transfer the money to your current 401(k) in the allocations you’ve chosen for that account.
Stinnett stressed that this only applies to accounts under $5,000. There are still people with larger lost accounts or pension plans instead of 401(k)s who will benefit from the national lost-and-found database.
“The lost-and-found registry is a novel approach to a similar problem,” Long explained. “It provides information to help participants find out who has your money but doesn’t help move the money. The database serves as a backup for anything that cannot be solved by auto-portability.”
