‘The True Cost of Forgotten 401(k) Accounts’

An update of a so-called “study” has been making the rounds—again—and its authors have doubled-down (and then some) on the assumptions in an updated version.

I’m referring to something called “The True Cost of Forgotten 401(k) Accounts (2023)”—an update to a report circulated about a year ago of the same title (sans the “2023” qualifier) by a firm called Capitalize. The first report claimed that there was $1.35 trillion in “forgotten” 401(k) accounts—the latest iteration has upped that number to $1.65 trillion.

That’s right, $1.65 TRILLION.

Not that the report’s authors make it hard to be incredulous about their results. Their executive summary claims that a full 25%—that’s a full QUARTER—of all 401(k) plan assets are, by their definition, “forgotten.” And if you’ve ever “left behind” a 401(k) account at a previous employer—well, apparently you’ve “forgotten” that account by their definition.  

Now if that definition of “forgotten” winds up being more credible than the one hinted at a year ago—the notion that these balances were truly lost, a.k.a. the “orphan” accounts that individuals truly have lost track of—a category that the Employee Benefit Research Institute (EBRI) has estimated[1] at $1.5 trillion OVER A 40-YEAR TIME PERIOD—well, the underlying assumptions—not to mention the mathematical extrapolations based on those underlying assumptions—are not. 

The authors mostly took the baseline they conjured up a year ago (see “Compounding the Problem(s))—this includes some assumptions not only about the rationale for the decision[2] to leave the account where it is, but an alleged fee differential between IRAs and 401(k)s (they claim IRAs are less expensive), make a swag assumption about the average size of those accounts, and cut that alchemy in half (to be “conservative”). The new version builds on that shaky foundation by applying some assumptions about job turnover from the Great Resignation—and, no surprise, job turnover (apparently) means (even) more 401(k) accounts “left behind.”

The Assumptions

At a high level, they assume: 40% of workers cash out[3] their 401(k) (with no apparent allowance for account balance), say they used IRS data on rollovers to determine rollovers, assume 2-3 million workers rollover their 401(k) (based on GAO data that said 401(k) to 401(k) rollovers account for 10-15% of total rollovers, and “impute” (their word) the number of “newly forgotten 401(k)s based on the difference between the total number of 401(k) accounts tied to job-changers and those who cash out, roll over to IRAs, or roll over into 401(k)s.” Bearing in mind that they will then take the number of accounts, and multiply THAT by the average account balances they derived earlier. 

Now, that might explain why they wind up with a number that represents a jaw-dropping quarter of 401(k) balances allegedly “forgotten”—but fails to explain why any credence should be put on that derivation. It is, quite simply, math that takes questionable assumptions, pulls a number out of the middle of those, and multiplies it by other questionable assumptions, producing a large number that is then said to be drawn from credible sources. But even credible sources are quickly waylaid by bad assumptions concocted from some kind of unarticulated triangulation.

Yet another example is the $115 BILLION they say is the “potential collective opportunity cost” from these accounts left behind—the result, they claim, “as a result of poor allocation and above average fees these accounts could experience.” To get to that number, they take the number of accounts they’ve conjectured (29.2 million in 2023) and then multiplied THAT “by the foregone savings one of these accounts would experience in a single year based on our scenario analysis (~$3,900).” “One of those accounts” being that $55,000 average they started with. I kid you not.   

The Motivation?

That said, this time around, the motivations behind the report from Capitalize are to my eye more obvious than they were a year ago. Their assertions are primarily that these balances left behind are paying fees in excess of what they might—presumably in the warm embrace of firms such as firms like Capitalize that offer a rollover solution. This time the report wastes no time highlighting the potential issues with leaving your 401(k) balances “behind”; that it becomes harder to track fees, allocate funds, and that your fees may be larger if you leave it with the plan of a smaller employer. They even invoke the notion that “unlike retail accounts” you may have limited choice with regard to fees “or other preferences.”

Honestly, I have tried to ignore this aberration. The number is nonsensical on its face, even with the most liberal definition of “forgotten.” But, it’s August—a slow news month—and journalists scrambling for a catchy lead apparently just can’t resist the opportunity. More distressing (at least to me) is the number of ostensibly well-meaning industry professionals who (continue to) share links to the uncritical coverage of this report.   

Interestingly enough, the dictionary defines “capitalize” as “to take the chance to gain advantage from.” 

Hmmmm….

Footnotes

[1] As a stand-alone policy initiative, EBRI has projected that the present value of additional accumulations over 40 years resulting from “partial” auto portability (participant balances less than $5,000 adjusted for inflation) would be $1.50 trillion, and the value would be $1.99 trillion under “full” auto portability (all participant balances). Under partial auto portability, those currently age 25–34 are projected to have an additional $659 billion, increasing to $847 billion for full auto portability. But that picks up all potential rollovers, and they certainly aren’t “forgotten.”

[2] Full disclosure—the author CONSCIOUSLY left behind every single one of his 401(k) accounts until recently. For account balances above $5,000 it was the easiest thing to do (e.g., “nothing”), for some of them it was a matter of appreciating the institutional pricing and/or options available there versus the new 401(k), and for at least one it was simply the aggravation involved in trying to get the funds from the old 401(k) mailed to me in a check. I’m happy to say that the process has improved somewhat over the years, though all three prior providers insisted on mailing me a hardcopy check (two, where Roth balances were involved). Oh, and I never “forgot” a single one.  

[3] Don’t get me wrong; “leakage” is a real concern, and rollovers, for the most part, remain a tedious process for your average participant. Too many smaller (and perhaps some larger) balances do, in fact, get lost or overlooked, and “attribution” via escheatment or force outs does occur.