'The Great Resignation' is exposing a key flaw of 401(k) plans -- here's how employers can get ahead of it

September 13, 2021
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If you’re a participant in the American labor market, then you’ve likely heard that we’re in the midst of “The Great Resignation.” According to the U.S. Department of Labor, workers are quitting their jobs in unprecedented numbers. Gallup recently reported that 48% of employees are currently searching for new jobs, and some studies have suggested that number might be as high as 95%. Anecdotes of increasingly rapid job switching abound.

Much of this is good news: Job seekers are taking advantage of a tight labor market and assessing their options. Often they’re finding jobs that better suit their skills and offer better pay and benefits. Even before “The Great Resignation,” employees started switching jobs more frequently. The average individual now changes jobs twelve times in their lives which means our tenure at any one particular job may be just a few years.

Unfortunately, this rapid job switching exposes one of the key structural flaws of our modern benefits architecture: Our benefits are almost all linked to our employers, so when we change jobs, we’re left to navigate transitions in benefits that often lead to frustration and coverage gaps. Worse, we may squander the hard work we’ve done in using those benefits in the first place.

Nowhere is this better illustrated than the growing epidemic of “forgotten” or left behind 401(k) accounts. Most Americans who participate in the retirement savings system do so through a workplace plan like a 401(k). Unfortunately, those plans serve us only as long as our tenure at a given employer. When we change jobs, those accounts don’t automatically come with us and we’re left to decide what to do with them. Many of us leave them behind in the chaos of changing jobs, losing track of their fees and investment options and rendering them “forgotten” for all intents and purposes.

Sadly, these forgotten accounts aren’t limited to those with small balances. Research published by Capitalize in June found that forgotten 401(k)s represent a whopping 20% of the $6.7 trillion total assets in 401(k) plans and number almost 25 million accounts in total. Clearly many of us don’t know what to do with a 401(k) when leaving a job. Saving for retirement is one of the most important financial objectives in an individual’s lifetime, yet employees are largely left on their own when it comes to taking 401(k) assets with them as they change jobs. This gap results in significant foregone savings.

This growing number of forgotten 401(k)s imposes a series of significant but often hidden costs on the employer which will only be exacerbated by “The Great Resignation.” The first of those is financial. When an individual leaves a 401(k) behind after exiting a company, the employer is often required to keep paying for the cost of maintaining that account. That’s because employers pay annual administrative and record keeping costs in connection with a 401(k) plan and those are usually incurred on a “per participant” basis. An employee who moves on from the company but leaves their 401(k) behind remains a participant in the plan — thus driving up the financial costs of providing a plan. Capitalize estimates that employers could be paying up to $700 million in additional 401(k) plan costs tied to these forgotten 401(k) accounts each year.

Employers also endure other ERISA-imposed obligations in connection with these “terminated participants” which take up significant resources. This comes in the form of paperwork and administrative time spent to keep former employees updated on the plan. There’s also HR time spent answering questions from former employees as well as the ongoing fiduciary exposure to make sure the accounts of those terminated participants are managed well. This fiduciary exposure isn’t just theoretical — there have been a growing number of class action lawsuits against employers for failing to meet these standards.

Thankfully there are ways for employers to help reduce the number of forgotten 401(k) accounts in their plan. As employees onboard and offboard, employers can provide information on what options are available for old 401(k)s and tools that help the individual decide which option is best. Whether moving assets into a new 401(k) or into an individual retirement account (IRA), the rollover process is often time-intensive and complicated. Employers may want to offer a concierge service that helps employees move 401(k) assets, which could easily be offered in conjunction with existing onboarding and offboarding benefits. This would ultimately increase the value of a benefits package and help employers make a positive first and last impression on the employee.

Providing this help is consistent with the increasing demand among employees for financial wellness as a benefit. Financial wellness is often overlooked during employee onboarding and offboarding, and employers can differentiate themselves by committing to helping employees make the most of their retirement benefits — even after they leave. “The Great Resignation” is creating a tight labor market and shifting power in the recruitment process from employers to employees. Any company hiring right now feels this shift and is competing for talent with compensation and benefits.

Offering a mechanism for employees to make the most of their 401(k) account when they’re coming or going is good for the employee and good for the employer. As more and more workers change jobs during the “The Great Resignation,” we’ll see more lost assets from forgotten 401(k)s. The fastest way to change this is through employer action. In doing so, the employer can provide a meaningful benefit that keeps giving — all the way to retirement.

Gaurav Sharma is the cofounder and CEO of Capitalize, a venture-backed fintech company focused on helping people save for retirement. Before founding Capitalize, he worked for some of the best-known financial institutions, including JP Morgan, UBS, Morgan Stanley, and as an investor at well-known hedge fund Greenlight Capital. An Australian by birth, Gaurav lives in New York City with his family.