Retirement plan participants broke record levels of savings in 2021, with higher levels of participation and contributions leading to an average 10% increase in account balances over course of the year. Yet, confronted with increasing inflation and uncontrolled healthcare costs, Americans are faced with growing concerns about retirement viability. Even changing jobs and pursuing a higher salary might not be enough, as a third of workers earning more than $250,000 still live paycheck to paycheck. But what if you could save $90,000 or more by avoiding one simple mistake?
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The True Cost of Forgotten 401(k) Accounts = $700,000 Over a Lifetime
As many workers know, the U.S. retirement system is heavily reliant on employer-sponsored retirement plans. Employees contribute pre-tax dollars to their retirement, employers have the opportunity to match those contributions and savers see their funds grow over time. But Americans also tend to change jobs every couple of years, and since direct contribution plans like your 401(k) are tied to employers, oftentimes those savings accounts get left behind.
Retirement investment platform Capitalize recently released a white paper estimating exactly how much money gets left behind every year – and the impact is huge. As of May 2021, Capitalize says that there are 24.3 million forgotten 401(k) accounts in the U.S., reaching 25 million by the end of last year.
Each year employees changing their jobs leave behind another 2.8 million 401(k) retirement accounts, and with the average employee changing jobs 12 times over the course of a career, the amount of retirement savings really adds up. 401(k) plans hold roughly $6.7 trillion in total assets and about 20%, an eye-popping $1.35 trillion, is held in those forgotten accounts.
Many employees also underestimate the cost of keeping multiple 401(k) accounts. A 2018 survey found that 85% of employers pass on all investment management costs to their employees, and a 2020 survey from TD Bank found that 73% of plan participants had no idea how much they were paying in 401(k) fees.
Fees vary widely between plan administrators, from 0.4% to over 2% of total assets. In a low-fee individual retirement account (IRA), a participant paying 0.4% averages $220 in fees per year. In contrast, an account with a high fee of 1.5% equates to roughly four times that amount, or $825 a year in fees. Over 30 years, the difference amounts to $90,000 in total account balance.
Further compounding the issue is the lack of rebalancing in these forgotten accounts. Capitalize notes that a well-balanced retirement account can dramatically outperform a forgotten 401(k) by over nine times. The difference grows even more if a low-balance, forgotten 401(k) is forcefully rolled into a Safe Harbor IRA by administrators, where the money is usually put into a low-yield money market fund.
Over a lifetime, “a string of forgotten 401(k) accounts could cost an individual almost $700,000 in foregone retirement savings,” Capitalize concludes.
How Retirement Savers Can Take Advantage
Based on an analysis of data from the Department of Labor, 401(k) recordkeepers and Census Bureau, the average forgotten 401(k) holds $55,400. Capitalize calculates that a forgotten 401(k) held in a 1%-yield money market mutual fund with an average 0.85% in yearly fees will only grow to $57,616 over 30 years. The same account held in a stable value fund with an annual return of 2.2% would grow to $83,349 over the same time frame.
Notably, if the same amount of money is held in a well-allocated, low-fee IRA or 401(k) with an average 9% annual growth, that same investor could have $751,378 by age 65. Savings on fees alone would gain the average retirement saver $90,000, and the power of compounding returns could add up to a wildly significant amount over the investor’s lifetime.
Unfortunately there is no national database to locate old 401(k) accounts at this time. As a result, it’s important for workers to keep an eye on their retirement savings plans. One of the easiest ways to manage this is by rolling your 401(k) savings into your new employer’s 401(k) account if permitted. Another option is to roll your retirement savings into a low-fee IRA at a brokerage firm. By keeping your retirement funds all in the same place, you’ll be more likely to maintain your portfolio and maximize your potential for a solid retirement.
According to retirement investment platform Capitalize, forgotten 401(k) accounts amount to over $1 trillion in missing retirement assets. Employees leave behind nearly 2.8 million retirement accounts every year as they change jobs, potentially robbing themselves of hundreds of thousands of dollars that could be used to ensure a smooth retirement. Instead of leaving your 401(k) funds behind, it’s important to consolidate your savings so you can better manage them. Consider rolling over your retirement savings to your new 401(k) plan or into a low-fee IRA to maximize your retirement potential.
Retirement Planning Tips
- Not sure what to do with all those retirement savings? For a solid, long-term financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free retirement calculator to get a good first estimate of how much money you’ll need to retire.
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