A new research paper suggests that policies that promote retirement saving, such as auto-enrollment, may unintentionally lead to an increase in abandoned retirement savings accounts.
In SSRN’s June 2021 paper, “Abandoned Retirement Savings,” authors Lucas Goodman of the U.S. Department of the Treasury, Anita Mukherjee of the Wisconsin School of Business and Shanthi Ramnath of the Federal Reserve Bank of Chicago find that 2.7% of retirees own an abandoned individual retirement account, standing at about $790 million in 2017, with over 40% remaining abandoned even after a decade.
More strikingly, the authors theorize that plan design changes that seek to expand retirement plan participation motivated by behavioral economics predominantly affect “passive” savers who are at a much higher risk of abandonment, both because the individuals themselves are less sophisticated and because the accounts into which they have been enrolled are not salient.
To get a better understanding, the authors examine the extent of unclaimed, or abandoned, retirement assets. In the first part of the paper, they attempt to establish the share of abandoned accounts among the retirement-age population by analyzing multiple datasets from IRS administrative records and state unclaimed property databases, with a focus on IRAs. They define an account to be abandoned if the individual fails to take a distribution from the account during any of the first three years in which an RMD was required to be taken.
While abandoned accounts tend to be small in value relative to non-abandoned accounts, the paper notes they are not trivial. The research found that the median account value is $5,351, or about 12% of the account holder’s income.
As for factors that are correlated with abandonment, the research found that abandonment decreases with higher account balance, but remains substantial nonetheless at 3% for accounts valued near $10,000 in 2017.
The research also found, however, that among abandoned accounts, about 60% of those valued at $3,000 or more were eventually reclaimed within 10 years. As one might expect, account value positively predicts reclaiming, but the behavior levels off at about 60% even for high-value accounts, suggesting a substantial level of continued abandonment, the paper notes.
The authors further observe that current policy to mitigate abandonment is focused on the use of escheatment to unclaimed property, yet plan participation is mostly voluntary and most accounts are neither escheated nor reclaimed upon escheatment.
They note that nearly all the funds cited above remain with plans and are not sent to state unclaimed property. In fact, with respect to escheated accounts, the researchers found that 36% of these accounts had balances of less than $100, suggesting that plan fiduciaries escheat accounts that have management costs exceeding returns. There are almost no escheated accounts worth more than $10,000, the paper notes.
Plan Design Drawback?
The authors next studied a population of “passive” savers, who they note were “induced” into holding an IRA through an automatic rollover. Here, they estimate abandonment rates are as much as 10 times higher for defaulted savings than for traditional IRAs—ranging from 23% to 45% (versus 2.7%) depending on the specification and threshold used.
While the authors note that there is continued debate about the benefits of auto-enrollment, they contend that their research supports a less recognized drawback of default policies—the possibility that such accounts, due to being less salient, are more vulnerable to becoming abandoned.
What’s more, they observe that plan participants who are defaulted into saving have been shown to have lower financial literacy, and therefore, are especially at risk for abandoning accounts.
Forgetting and “hassle costs” are also particularly important as retirees live longer and become vulnerable to cognitive decline, the study notes, which can lead individuals to “leave money on the table.”
The researchers suggest that tax policy providing preferential treatment for IRAs may require modification, since many savers do not withdraw their savings and pay taxes at the expected ages. Defaults into retirement saving plans may also require safeguards to prevent forgetting these accounts. In addition, they suggest that state policy for connecting unclaimed property with their owners could feature greater automation to improve these efforts.