I remember the first time I read about the "Accio" spell in the Harry Potter books. Accio is a summoning spell and useful for finding lost or forgotten articles. I easily could imagine my misplaced house keys flying into my hand. Of course, I am at an age where I use "cheater glasses. The "Accio" spell might reveal that my glasses are on my head. Ah, and the Monday morning coffee refill when I have no energy to walk to the coffee pot? Accio!
It was interesting then to read the research from Capitalize on how much they estimate is in the forgotten 401k market both from a number of accounts and dollar amount point of view. While there is no summoning charm for tracking down lost retirement plans, here are some thoughts based on the Capitalize report.
Scale of “forgotten” accounts
There are ~ 31.9 million 401(k) accounts which Capitalize calls “forgotten,” with aggregate assets of about $2.1 trillion. That compares to ~$9.3 trillion total 401(k) assets (so ~23% by that metric).
“Forgotten” is a broad definition
Capitalize’s “forgotten” includes accounts merely “left behind” (i.e. not consolidated), not strictly “lost” or “orphaned.”
Critics (e.g. NAPA’s Nevin Adams ) argue the methodology overstates the problem by labeling normal rollover behavior as “forgotten.”
Average balance & consequences
The average balance of these “left behind” accounts is ~$66,691 (up from $56,616 in 2023).
Keeping multiple legacy accounts can disadvantage participants by a) subjecting them to higher aggregate fees, b) causing them to possibly have a misaligned allocation (especially if their older accounts aren’t in target-date funds or can't auto-update), and c) with the passage of time, there is increased likelihood of truly forgetting the account which in turn impedes consolidation harder
Systemic limitations & policy response
The current retirement system lacks efficient default portability (plan-to-plan rollovers).
The DOL is developing a “Lost and Found” database to help participants locate stranded accounts.
Legislative proposals exist to ease transfer of unclaimed accounts to state unclaimed property authorities. Retrieving funds from those unclaimed property departments can be challenging.
Caveats & skepticism
Capitalize's account and dollar amount estimates may be inflated because of how “forgotten” is defined.
Many accounts “left behind” are eventually consolidated, so labeling all of them as “forgotten” can be misleading.
Even so, the growth of unmerged accounts underscores friction in the system. Simply put, it is not easy to move an old 401k to a new one.
The Parting Glass
Fiduciary risk & participant outcomes
Legacy accounts with excessive fees or misaligned asset allocations can harm participant outcomes over time, which reflects poorly on plan governance.
Opportunity for differentiation
Sponsors that adopt or offer streamlined account consolidation (e.g. automatic linkage, proactive roll-in services, nudges) can improve participant experience and potentially reduce “leakage” or disengagement. My two cents is that it is important to work with a fiduciary-based advisor who can help with consolidation.
Best practices to consider
Implement or partner with tools that allow participants to easily locate and roll in prior accounts (e.g. via aggregation or “find my 401(k)” services).
Offer compelling in-plan alternatives (lower fees, better investment options) so participants see value in consolidation.
Educate departing employees about rollover vs. leaving accounts to minimize “left behind” behavior.
Monitor how many participants maintain small legacy accounts outside your plan as a metric of friction.
Policy tailwinds
Legislation (and the DOL’s lost-account database) may reduce friction over time. Sponsors should stay abreast of regulatory changes that could make portability easier or even mandatory.