In October, retirement industry media outlets urgently reported on updated research estimating that there are 31.9 million “forgotten” 401(k) accounts, totaling about $2.1 trillion in assets.
Following the initial media reaction, NAPA Net posted two sober-minded takes on the research – the first by Paul Mulholland, followed by retirement industry icon Nevin Adams – who both questioned the study’s methodology and conclusions, contending there is no justification for broadly labeling these accounts as “forgotten.” Mulholland also observed that the figures better "serve as a proxy for a lack of efficient account portability."
I concur with the insightful views of these two gentlemen, and I took a similar position in this 2021 article, when the first “forgotten” account analysis was released.
If the underlying problem is a lack of portability and consolidation within the 401(k) system, then what is driving this problem, and what constitutes the optimal solution?
The Problem with Portability
When broadly considering our 401(k) system, there is, in fact, a significant amount of 401(k)-to-IRA portability, which each year transfers up to $1 trillion from the defined contribution system and into IRAs. According to Cerulli, in 2021 almost two-thirds of these IRA rollovers are driven by financial advisors, who are “particularly adept at capturing rollovers with balances above $200,000.”
These figures dwarf rollover contributions flowing into the plan-based system (“roll-ins”) by almost 14-to-1, based on DOL Private Pension Plan data, which pegged the value of roll-ins at $72.4 billion in 2022.
A partial solution to 401(k) portability is auto portability, which relies on financial technology, a network of DC recordkeepers and a solid legislative & regulatory framework – to seamlessly move account balances less than $7,000 from plan-to-plan, on a negative consent basis. When fully adopted, auto portability will account for roughly $12 billion of incremental roll-ins, on an annual basis.
But what of the larger balances that remain in 401(k) plans? Certainly, many will choose to leave their balances intact in their former plan. However “sub-optimally” one wishes to characterize it, that choice is infinitely better than the alternative of cashing out. In fact, some large plans with participant-friendly plan provisions and low-cost investments position themselves as “home” plans and allow roll-in contributions from previously terminated participants.
More broadly, the truth is that systemic friction is hindering plan-to-plan transfers, and it presents itself in the form of manually-intensive, arcane and stress-inducing processes that make the best choice – consolidation – the hardest to achieve.
In my view, there are three candidate solutions to the defined contribution system’s lack of portability and consolidation, but only one of them makes sense, based on the numbers.
The Non-Starter: DIY Roll-Ins
I’m referring here to the infamous, form-based “do-it-yourself” (DIY) roll-in, which is not so much of a solution, as it is a perfect illustration of the friction problem. The difficulties encountered by those attempting to perform DIY roll-ins largely explain why so few 401(k) plan-to-plan consolidations are completed.
If you’re a hardy soul who has attempted to roll-in a prior employer’s 401(k) balance into your current employer’s plan, you understand how difficult the process can be, where you’re faced with confusing, highly manual, non-standard processes that are perceived by most participants as not worth the effort or risk.
Still, if given a population of fearless, highly motivated participants, could DIY roll-ins solve our portability problem? In theory, yes, but at a steep cost.
Based on a median, dedicated personal time commitment of 9 hours per roll-in (source: Portability and the Mobile Workforce, Boston Research Technologies, 2015), paired with data from a recent Empower study, where the average person values their personal time at $240 per hour (source: Time is Money, Empower, 2024), we estimate that to consolidate 31.9 million accounts of separated participants would cost almost $69 billion, or $2,160 per consolidated account.
If these figures sound ridiculously high to you, consider that the above estimates include no time or cost for recordkeeper call center personnel required on either end of portability transactions to take calls, handle forms, process distributions, accept contributions and to identify and resolve errors.
Clearly, DIY roll-ins will never be embraced by 401(k) participants, nor will they be encouraged or enthusiastically supported by plan recordkeepers.
The Stopgap Measure: Assisted Roll-Ins
Thankfully, there’s a best practice available now that dramatically improves both roll-in outcomes as well as the participant experience of the roll-in process.
The Assisted Roll-In, a concierge service offered by some large plans to their new or active plan participants, isolates participants from roll-in complexity by pairing workflow technology with expert assistance. By working with a roll-in specialist, participants can rely upon the specialists’ access to specialized workflow tools, as well as their in-depth experience with roll-ins – both of which are vital to overcoming typical obstacles, increasing accuracy and speeding the process.
While the assisted roll-in represents a dramatic improvement over the DIY roll-in and has found a home in some very large plans, it is unlikely to be adopted on a massive scale, as it merely masks the underlying, systemic frictions that exist.
While the assisted roll-in dramatically reduces the amount of personal time required to 1 hour (vs. 9 hours for the DIY roll-in), the process typically includes a fee of roughly $70 per transaction, which could be participant-paid or paid by the plan as a permissible expense. Were assisted roll-ins to be adopted on a widespread basis, we estimate that consolidating 31.9 million separated participant accounts would cost $9.9 billion, or $310 per consolidated account, inclusive of both fees and personal time.
The Future: Automatic Transfers
An automatic transfer could fundamentally transform plan-to-plan portability by utilizing the infrastructure, data security, data exchange and operating standards established by auto portability.
One could easily envision – like auto portability – a network of recordkeepers that have agreed to common rules and protocols for electronic account transfers between plans. Participants could have access to multiple, easy-to-use service channels that promote e-consent, identification of former plan accounts and notification & tracking of consolidation status.
Importantly, the automatic transfer need not be limited solely to plan-to-plan transfers and could be adapted to include automatic transfers to IRAs, provided that the participant identified the target IRA account and the IRA provider participated in the network. Finally, an automatic transfer should support the elections of participants who choose to leave their savings in-plan.
When contrasted against the DIY roll-in and the assisted roll-in, the automatic transfer is in a league of its own, involving only a modest, participant-paid fee of $30 per consolidated account, which would equate to a systemic cost of $957 million to consolidate all 31.9 million accounts.
Automatic Transfer: The Clear Choice
I leave you with several key takeaways from my analysis.
- Obviously, not every left-behind account is forgotten; many separated participants are quite happy to leave their 401(k) savings in their former employer’s plan.
- When it comes to portability – but particularly plan-to-plan portability – the 401(k) system is rife with friction.
- An affirmative consent-based automatic transfer process, applying to all balances not covered by auto portability and supporting IRA rollovers, plan-to-plan roll-ins, as well as those who choose to stay in-plan – represents the optimal solution for addressing the problem of left-behind accounts.
- Like auto portability, an automatic transfer should be supported by an industry consortium, which is operated in the best interests of all parties.