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Nearly 31.9 million 401(k) plans have been forgotten or left behind when employees are terminated or change jobs. That represents one-quarter of all 401(k) savings plans and amounts to $2.13 trillion in assets, an increase of almost 30% over the past two years, according to a Capitalize white paper produced in conjunction with the Center for Retirement Research (CRR).
The number of abandoned accounts is growing even though fewer Americans have changed jobs during the past two years, likely due to higher participation rates in 401(k) plans and a difficult rollover process, said Capitalize. Participants generally have four options to manage their 401(k) at the point of job change, including rolling over into an individual retirement account (IRA), rolling over into a new 401(k) if allowed by the new employer, cashing out assets, or leaving the money behind.
“These choices often come with financial and tax jargon, and confuse many Americans who are
more focused on their next job than dealing with the administrative hassle of offboarding,” said the report. “As a result, many Americans postpone their decision, intending to revisit their 401(k) and deal with it later. The result is that many savers end up with a series of left-behind 401(k) accounts tied to prior employers, each of which might have a different set of investments, fees, and custodians.”
This year, an estimated 4.2 million 401(k) plans will be left behind, more than the 4 million accounts left behind in 2024 and 3.5 million in 2023, according to Capitalize estimates. The average account balance of a forgotten 401(k) has reached nearly $67,000, up from $57,000 in 2023.
Volatility in the Federal government workforce may lead to more forgotten account dynamics in the public sector. Layoffs in the Federal Government have led to growth in the number of left-behind Thrift Savings Plan (TSP) accounts, with almost 3 million TSP accounts now projected to be left behind by the end of 2025.
The analysis estimates forgotten 401(k) accounts can cost an individual more than half a million dollars in forgone retirement savings over three decades in worst case scenarios. That’s because millions of forgotten 401(k) accounts are not in target-date funds and require more active monitoring. The chances of monitoring and rebalancing decline meaningfully over time. In addition, many accounts are subject to forced rollovers into Safe Harbor IRAs under SECURE 2.0. Additionally, more accounts will now be subject to “forced rollovers” into “Safe Harbor IRAs” These accounts typically invest in conservative vehicles with returns that fall short of a diversified portfolio of stocks, bonds, and other assets, said the report.
Alternative assets in 401(k)s are an emerging consideration that may complicate the picture. It is unclear how the inclusion of illiquid assets will work when participants change jobs or forget about their accounts. Unlike most of the assets in 401(k)s today that benefit from daily pricing, most traditional alternative investments are priced quarterly or annually, often with a lag of 60–90 days, said Capitalize. Fees and valuation differences will require a learning curve for individual participants, who may have to assess what to do with a private equity investment in their 401(k) at the point of job change.
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