Far too many Americans are putting off retirement planning, relegating it to the same peripheral space in their brains as that missed trip to the gym: We know we need to do it, but something more pressing — more immediate — always takes precedence. However, just as there are adverse health outcomes to a sedentary lifestyle, Americans who haven’t adequately saved for their retirement must face the music one day.
According to a 2022 Federal Reserve survey of consumer finances, only slightly more than half of all Americans (54%) have retirement accounts. Most American workers save for retirement via an employer-sponsored 401(k) account, with one recent survey showing that 6 in 10 workers with access to a 401(k) were contributing. However, that means 40% of their colleagues were opting out — a decision that could hurt them later in life.
Addressing America’s retirement readiness problem will require big ideas, not just from companies but in partnership with the government. Fortunately, there is precedent for that. Two years ago, the federal government passed SECURE 2.0, which enacted 90 new provisions affecting retirement savings plans. One such provision allowed certain employers to automatically have employees opt into their company’s 401(k) plans, placing them in a fund based on age and target retirement date.
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This change means that employees who haven’t considered retirement won’t needlessly miss out on the benefits of accruing compound interest (though they can still opt out). While SECURE 2.0 helps mitigate some critical issues, it doesn’t address one significant problem.
Recent estimates have shown that 1 in 5 U.S. workers have a forgotten 401(k) account. This trend increased following the Great Resignation, when record numbers of employees voluntarily resigned, beginning in early 2021, during the pandemic. If an employee leaves their old 401(k) behind with a former employer, that company can roll smaller accounts with $1,000 to $5,000 in investments into an individual retirement account (IRA). However, unlike automatically opting into a 401(k) — which places the employee in a fund with an appropriate risk profile based on age — when former employers roll over 401(k) accounts, these funds are put into cash as the default option, earning literal cents on the dollar and accruing high fees.
According to research from Vanguard, among rollover IRAs dating back to 2015, roughly 28% of those investors remained in cash seven years later. For investors under age 55, the long-term benefit of investing in a target-date fund rather than staying in cash would yield roughly $130,000 at age 65 — or an aggregate of $172 billion for all IRA rollover investors.
In an ideal world, the government would pass legislation requiring companies to roll over 401(k)s into a similar growth fund. Absent that, employees must be vigilant about safeguarding their savings. Here are three steps workers who may have a left-behind 401(k) should take to protect themselves.
1. Know what you’ve got
The first step to planning for retirement is understanding what you have and where those investments are. Start by going through old statements. If you can’t locate either hard copies or email statements, contact your former employer — the benefits manager should be able to see whether you participated in the retirement plan during your tenure.
You can also check to locate the company’s Form 550, which will have contact information for your former employer’s plan administrator.
Lastly, you can search the National Registry of Unclaimed Retirement Benefits and the National Association of Unclaimed Property Administrators, the latter of which will help you track down not only unclaimed 401(k)s but other assets, too.
2. Research and decide where to move the money
After you’ve located your 401(k), you’ll want to research your options for reinvesting the funds. Look for low-cost IRA options such as a robo-adviser, which offers lower fees and places investments into an asset-allocation model based on the investor’s age, or a low-cost fund provider, such as Vanguard or iShares, a unit of BlackRock. These providers offer a wide range of index-based investment options with lower fees.
3. Consolidate accounts and consult with a professional
Investors with multiple accounts should consider consolidating them. Not only does this make it easier to keep track of your investments, but if you hit a certain threshold, you could qualify for some type of personalized financial advice, whether it’s working with a dedicated adviser or through a hybrid program that pairs automated investing with access to expert support.
Most financial advisers will provide a free consultation, so take advantage of that to meet with them and better understand your options.
How do we fix America’s retirement readiness problem? Though there isn’t one easy solution, the focus should be on making it easier for people to have greater access to investment options. This is where many of the states are succeeding.
To date, 11 states have auto-IRA enrollment programs — akin to 401(k) automatic opt-in — whereby employees without access to qualified retirement plans through their work are automatically opted into a state-run IRA program and placed in a target-date fund. However, investment options may be limited, so it’s a good idea for all investors to take an active role in their retirement planning and, if possible, consult with a professional.
Investors don’t have to be wealthy to work with a financial adviser. Not all advisers have six- or seven-figure minimums; some will work with clients for as low as $20,000 in investable assets or offer a fee-for-service option to help people just starting out. Investors can also look for financial advisers willing to work pro bono. The Foundation for Financial Planning can help connect low-income individuals and families with a qualified adviser at no cost.
Whatever you do, the most important thing is to figure out your assets, research potential options and move your investments into a growth-oriented vehicle. This is a situation where inertia will cost you.
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