As defined contribution takes over as the main retirement savings vehicle from defined-benefit plans, the system must resolve the issue of forgotten accounts.
Capitalize, a fintech startup focused on IRA rollovers, estimates that there are about $1.35 trillion in assets in more than 24 million forgotten accounts, leading to $116 billion in lost retirement benefits annually.
One of the advantages of 401(k) and 403(b) plans is that workers do not have to stay at one organization for 20 or more years to receive the retirement benefit. That is essential, as people change jobs 12 times on average, and many are now part of the gig economy.
“We estimate that at least 15 million workers with a DC account change jobs every year,” Capitalize CEO Gaurav Sharma said.
What is needed is a network of DC record keepers that share account information, something that Spencer Williams, president and CEO at Retirement Clearinghouse, has been working on for more than a decade.
“No one argues against auto portability,” Williams said. “But we need critical mass [to be successful].”
“Auto portability is not the endgame,” he said. “Why should a person have to enroll in their DC plan more than once? The network is the endgame.”
Getting record keepers on board is hard, unless they are required by law or they see a way to make or save significant money.
“Market forces result in record keepers doing nothing,” FPS Group CEO Bill Mueller said. “Employees have to enroll in a new plan before they can transfer assets. The tough part is exiting.”
Anyone who has tried to roll assets out of a DC plan knows how difficult and time-consuming it can be.
“I can buy Game Stock call options on my smartphone in five seconds, yet it can take months to roll over my DC account,” Sharma said.
Sen. Elizabeth Warren, D-Mass., has recently introduced legislation that would create a registry for forgotten accounts. If the measure is successful, it will likely become part of a broader retirement bill.
Firms like FPS, Retirement Clearinghouse, Millennium Trust and PenChecks tend to focus on IRAs that are automatically set up for former employees who had less than $5,000 in a retirement plan and try to locate lost participants.
“Aren’t forgotten DC accounts like unclaimed property? State laws that connect people with their assets can help,” Mueller said.
Capitalize, which launched in September 2020, is focused on helping people roll over DC assets regardless of account size. The company recently raised $12.5 million in a Series A round, none of it from strategic investors.
The network that Retirement Clearinghouse has proposed is needed. Once a person enrolls in a DC plan, all their account information would be maintained, and their assets would be automatically rolled into their current employer’s plan, at their most recent deferral rate, unless they choose to keep it with their prior employer or roll it into an IRA.
Sounds simple, right? But unfortunately, nothing is easy in the DC world. For some providers, the accounts are too small to matter. Others make money from them, especially if they charge a per-head fee. Advisers charging asset-based fees could lose as well.
Auto features took off after the 2006 Pension Protection Act because everyone profited, especially record keepers and advisers. The DC industry is great at claiming that it wants to help participants be more successful in retirement, with a caveat — only if the industry benefits greatly.
Even if record keepers can’t come together in a network that allows auto portability, requiring people who are rolling in or rolling over their DC accounts to go through onerous steps that can take months is a blight on our industry. It’s another reason for more government intervention, maybe even nationalizing the system, as DC plans and IRAs become the primary vehicle for retirement savings.
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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.