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We are already halfway done with the 2020s and on the road to 2030. Yet some aspects of our country’s robust 401(k) system are stuck in the 20th century.
In the last century, it was much more common to spend your entire working life at a single employer and retire with a secure pension.
However, today’s American workforce is more mobile than ever. According to the U.S. Bureau of Labor Statistics, the average American worker will hold about 12 jobs during their career, with most of their job changes occurring before the age of 40.
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That translates to an estimated 15 million to 20 million Americans who participate in their employers’ sponsored retirement plans changing jobs in a typical year. Every job change can involve an address update, along with new plan enrollment.
Americans also move homes frequently. American Community Survey (ACS) data indicates that the average American changes residences about 11 times over their lifetime. This translates to 15 million to 25 million retirement accountholders moving to new addresses every year, according to U.S. Census Bureau estimates.
On top of that, Retirement Income Institute data indicates that about 4 million to 6 million Americans retire annually, with 60% to 70% of them participating in some type of retirement savings plan.
All of this mobility — changes in employment, mailing address and labor force status — increases the likelihood that people will accumulate retirement savings across multiple accounts.
Friction and fragmentation in the 401(k) system
Despite an increase in workforce mobility, service providers across the U.S. retirement system — including plan recordkeepers, custodians and government agencies — run on different technology systems that do not natively “talk” to each other.
Our nation’s retirement system involves interactions among millions of savers, hundreds of thousands of employer-sponsored retirement plans and many different service providers.
Unfortunately, among all the bustling activity across disparate systems, the easiest course of action for job changers is to leave their 401(k) accounts in their prior employers’ plans when they move on.
Moving data and money between plans is often cumbersome and error-prone, especially if recordkeepers, IRA providers and others rely on legacy technology systems that are long overdue for upgrades to digitized, automated workflows.
Even if recordkeepers and other service providers do invest in modernizing their legacy systems, they can never fully digitize their operations — they still must exchange data, instructions and documentation for mobile workers with counterparties that are stuck with legacy or partially digitized systems.
This fragmentation has created persistent friction within the retirement system, making it easier for workers to leave 401(k) balances behind in former employers’ plans when they change jobs, or worse, cash them out completely.
The U.S. Department of Labor reports that the percentage of inactive accounts in defined contribution plans increased from 21.1% in 2010 to 29.2% in 2023. That means nearly a third of accounts with balances in our country’s defined contribution plans are inactive, because the accountholders are no longer employed by the plan’s sponsor.
But “inactive” does not mean “abandoned.” Many former employees intentionally leave savings in a prior employer’s plan, particularly if fees are reasonable or investment options are competitive. Labeling all inactive accounts as “forgotten” risks overstating the scale of the problem.
A more meaningful indicator of a truly lost 401(k) is returned mail, when plan communications are sent back as undeliverable because the participant’s address of record is no longer valid.
Research conducted by Boston Research Technologies and Retirement Clearinghouse in 2018 found that returned mail is a stronger signal of participant disconnection than inactive status alone.
Even then, returned mail does not necessarily mean a participant is unaware of their account — only that communication channels have broken down.
Under current rules, inactive 401(k) accounts with balances under $1,000 may be automatically cashed out, while balances under $7,000 can be rolled into safe-harbor accounts if the participant does not take action.
These provisions were designed to simplify plan administration, but they also introduce additional steps for workers who might later want to consolidate accounts.
If contact information is outdated, notices about these transactions may not reach the participant, underscoring why accurate address records remain critical.
Even an automatic cash-out of a 401(k) account with up to $1,000 can have a detrimental effect on the income a worker can enjoy in retirement.
Our research at Retirement Clearinghouse finds that a 25-year-old with a $750 401(k) account balance that is automatically cashed out today could wind up forgoing $9,312 in retirement savings that the $750 would have grown to by age 65 — had the sum remained invested in the retirement system and earned an annual rate of return of 6.5%.
The cash-out conundrum
The lack of communication between service provider systems and seamless plan-to-plan account portability has tempted too many workers to prematurely cash out their 401(k) accounts after they change jobs.
The decision to cash out can be costly, which not only subjects retirement savings account balances to taxes and penalties, but also depletes an accountholder’s overall retirement saving outcomes.
Cashing out just one 401(k) account on the road to retirement can seriously deplete someone’s retirement income. Our research at Retirement Clearinghouse indicates that preserving one 401(k) account with $7,000 in the U.S. retirement system at age 25 can add $86,912 in extra savings by age 65.
Similarly, preserving three 401(k) accounts with $7,000 after switching jobs across a hypothetical worker’s entire career can eventually generate $157,878 in savings for retirement.
Despite the clear benefits of not cashing out 401(k) savings after switching jobs, too many Americans do so.
According to data from the Savings Preservation Working Group, at least 33% of plan participants withdraw part or all of their retirement plan assets following a job change. However, minorities and younger, low-income workers cash out at rates above the national average.
That 33% rises to 44% for plan participants aged between 20 and 29, and 50% for those earning annual income of between $20,000 and $30,000, according to a Fidelity Investments study.
Hispanic and Black participants cash out at even higher rates — 57% of Hispanic participants and 63% of Black participants cash out within a year of switching jobs, according to a study from Ariel Investments and Aon Hewitt.
Simplifying the consolidation and transfer of 401(k) assets
Industry-led efforts are now attempting to address this fragmentation by building digital infrastructure that allows recordkeepers to exchange data and move assets more efficiently when workers change jobs.
One approach that has taken hold is auto portability, an automated process designed to move certain small retirement account balances from a worker’s former-employer plan into their new employer’s plan, unless the worker opts out. The objective is to reduce unnecessary cash-outs and prevent small balances from being left behind.
In recent years, an industry-led utility known as the Portability Services Network was launched to support broader adoption of auto portability among recordkeepers.
Workers have more options today than in the past to avoid abandoning or cashing out 401(k) balances when they change jobs. To maximize the income they can enjoy in retirement, workers changing jobs should ask their plan administrators how small balances are handled, and what options exist for consolidating accounts to avoid unnecessary cash-outs.
While the system remains imperfect, incremental improvements in digital portability and standardized data exchange could meaningfully reduce friction for future job-changers.
The real forgotten 401(k) problem is less about millions of Americans losing track of their savings, and more about whether the system makes it unnecessarily difficult to keep those savings consolidated.
Clarifying what is truly at risk, and modernizing how assets move between plans, may ultimately matter more than the headline numbers suggest.
Spencer Williams is president and CEO of Retirement Clearinghouse, a specialized provider of retirement savings portability and account consolidation services, and Portability Services Network, a retirement industry-led utility dedicated to nationwide adoption of auto portability.
