Americans may be missing out on big retirement savings because of this one mistake

The high resignation rate over the past two years has increased the amount of money American workers leave behind in 401(k) funds, a recent report by Capital said. (iStock)

The amount of forgotten 401(k) accounts — those left untouched when workers leave or change jobs — has grown by millions over the last two years, according to a recent report.

Americans have collectively forgotten roughly $30 million in 401(k) accounts as of May 2023, an increase of over 20% from May 2021, the report by Capitalize said. In a worst-case scenario, funds forgotten in 401(k) accounts could cost an individual several hundred thousand dollars in foregone retirement savings over a 30-year timeline, the report said.

The uptick in forgotten funds correlates with the so-called Great Resignation trend, which saw droves of workers quit their jobs in the last two years, according to Capitalize. As a result, 3.8 million retirement accounts were left behind in 2021 and 4.4 million in 2022.

"We've seen people change jobs at elevated rates - and leave their 401(k) accounts behind as they go from job to job," Capitalize CEO Gaurav Sharma said in a statement. "This reflects one of the structural problems with our 401(k) system: our retirement accounts remain tied to our employers and their 401(k) plans, leading to significant friction at the point of job change."

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Most workers are unaware of how much they pay in retirement plan fees

Americans remain unfamiliar with 401(k) fees, as 71% of respondents said they were uncertain about the amount they were currently paying, according to the report. Additionally, almost half guessed they spent less than 0.4% of total assets on 401(k) fees.

However, they likely paid more since only 10% of all plans charge less than 0.4%, Capitalize said. The median 401(k) fee is 0.79% of assets per year, while the 90th percentile is more than 1.4% per year as of September 2022, according to updated data from the Investment Company Institute (ICI). Not all fees are passed to savers, but many are, Capitalize said.

"These fees are not just the investment fees in the account but can often include administrative and advisory fees that are associated with a 401(k) plan and are passed onto savers in those plans," Capitalize said. "These 401(k) account fees remain material."

More importantly, beyond the fees, these forgotten savings are at risk of misallocation, according to Capitalize. Altogether, the hit to potential savings from poorly managed 401(k)s could be almost $115 billion annually, Capitalize estimated. In a worst-case scenario, a badly allocated, high-fee 401(k) could miss out on several hundred thousand dollars in foregone retirement savings over 30 years.

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Here's how you can track down an old 401(k) account

As the prospect for higher unemployment increases and more Americans are automatically enrolled in 401(k)s, it is likely that the amount of forgotten savings will rise, according to Capitalize. But locating these funds may become more accessible due to critical changes under the Secure 2.0 Act of 2022 – a follow-up to the 2019 Secure Act.

The legislation directs the U.S. Department of Labor (DOL) to establish an online lost-and-found database for workplace retirement accounts by 2024. It will allow a worker to search for contact information for plan administrators of plans in which the participant or beneficiary may have a benefit. Employers must share information on former employees with the DOL to keep the database current.

For now, workers changing jobs have a few options when it comes to how to deal with workplace retirement accounts that, include:

Rolling over the 401(k) savings into an individual retirement account (IRA).
Rolling over the old 401(k) into a new 401(k) account — if permitted by the new employer.
Withdrawing ("cash-out") the old 401(k) assets.
Leaving the money behind in the former employer's 401(k) plan.

"These choices can be confusing," Capitalize said. "Unsurprisingly, many Americans defer the decision and leave their 401(k) behind to deal with later. The result is that job switchers can end up with a string of 401(k) accounts tied to former employers, each with different fees, asset allocations, and custodians."

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