Imagine the delight and confusion of a single mother “finding” hundreds or even thousands of dollars of her own money that she had long given up on seeing again — or maybe didn’t even know existed. It sounds fanciful, especially in the age of digital banking, yet tens of thousands of Americans “lose” their retirement accounts every year as they change jobs, addresses, and names. Thankfully, recent policy proposals and private sector innovations promise a better way to keep savings in the hands of their rightful owners and ensure lifelong financial health for America’s most vulnerable populations.
Rapid economic changes and an increasingly mobile workforce have created new challenges for the traditional employer-based retirement savings system, leading to the unwitting separation of workers from assets they set aside for future consumption. As stable, tenured employment grows anachronistic (24 percent of millennials changed jobs each year from 2008 to 2013), workers are leaving behind small pools of retirement savings as they bounce from one short-lived job to the next. The implications are troubling for low-income earners — 36 percent of workers who left an account with a stale address at a previous employer earn less than $50,000 annually.
At the root of this crisis is a significant juncture in the American employment experience: the retirement savings distribution at job departure. For individuals saving in 401(k) plans, this process often results in either decision paralysis due to the complexity of roll-over choices or neglect due to preoccupation with everyday life. Ideally, savers switching jobs would either roll over their accumulated assets into their new workplace plan (if one is offered), or actively decide to keep their money in their previous plan, perhaps due to attractive investment options or low fees. Unfortunately, the temptation of a lump sum infusion or simple inertia often prevails, leading savers to either cash out their balance and face heavy tax penalties and loss of future investment earnings, or do nothing at all and leave their money behind.
The employers that sponsor retirement plans are also burdened by “abandoned” accounts, particularly those with low balances, because they can be costly to administer. Employers are allowed to terminate an abandoned account with a balance of less than $5,000 (there are 16 million of these across the country), but only after conducting a thorough — and costly — search for the missing participant. To effectuate the termination, employers transfer the balance to an outside IRA, which can have high fees that eat away at savings over time. Of course, once an account has been closed and transferred to an IRA, the chances of reuniting the saver with their money grow even slimmer — only 30 percent of forced transfers to IRAs are claimed within the first year, with the balance remaining unclaimed indefinitely.
The recent shift to auto-enrollment, while rightfully lauded for producing massive improvement in employee uptake, has likely contributed to the missing participant problem, since today many workers are enrolled in retirement accounts without their knowledge and thus don’t think to check-in during job transitions or update their former employer when they move.
Fortunately, there are ways to improve this system for employers, asset managers, and workers alike. Employers facing the double-headwinds of worker turnover and pressure to provide benefits would be greatly helped by more streamlined systems and regulations around distribution for small-dollar balances. Asset managers stand to profit from unified retirement accounts, which could be pooled to produce greater investment returns. Workers would feel more confident enrolling in workplace-based savings programs knowing that their earnings follow them throughout a lifetime of employment. Action is now underway on both the policy and market innovation fronts to address this set of challenges.
In policy, newly reintroduced legislation with bipartisan support seeks to address the lost account crisis at the federal level. Prompted by a 2015 TIAA study showing that 30 percent of employees had left behind some retirement savings as they switched jobs, Senators Elizabeth Warren (D-MA) and Steve Daines (R-MT) introduced the Retirement Savings Lost and Found Act (RSLF) first in 2016, then again in March 2018. This act proposes a three-pronged solution that would establish America’s first national retirement savings registry, in addition to simplifying search requirements for employers and increasing the dollar amount for forced transfers into IRAs.
There is both international and domestic precedent for such a registry. Federally operated registries in the United Kingdom, Denmark, The Netherlands, Australia, and Belgium help citizens stay on top of their retirement accounts, while also providing the government with clearer pictures of citizens’ assets for tax and social policy purposes. In the US, the Pension Benefit Guaranty Corporation has a registry for defined benefit plans covered under its authority, and the Department of Labor hosts an “Abandoned Plan Search” database for participants of terminated plans. The success of these existing databases substantiates the feasibility of a nationwide lost-and-found tool. Moreover, consumer and industry advocates including AARP and the ERISA Industry Committee have submitted letters of support for the registry component of RSLF.
In contrast, consolidated search requirements in the new version of RSLF are not universally supported. Consumer advocates express concern that reduced search requirements, though perhaps simpler than the current rules, could lead to even more lost accounts. Pension Rights Center’s Jane Smith raises that the “new bill’s search criteria are far less comprehensive than current Labor Department and PBGC rules,” and should therefore “be dropped.” Where these requirements may fall short, however, the private sector has already begun designing innovative products and services to bridge the gaps.
In this growing market, some companies are leveraging algorithmic processing to automate and streamline the distribution process, while others have established their own proprietary databases for lost and missing accounts. Retirement Clearinghouse offers an “auto-portability” service that helps individuals manage distributions at job change and serves plan sponsors by reconnecting claimants to lost accounts. PenChecks Trust and the Millennium Trust Company each offer their own private searchable databases. How these services will interact with potential changes in federal regulation is yet to be seen, but it will be from this intersection of policy and innovation that the best solutions for American workers will arise.
In many ways, the crisis of missing accounts is indicative of larger challenges facing a retirement system built for a bygone era. Herein lies the opportunity, however, to build solutions that go beyond retroactively reuniting workers with lost accounts to instead set the stage for a future-oriented system, one that would serve not only short-tenured workers but also the growing contingent workforce, and would elevate universal portability as a key goal.