Insights on Retirement Plan Stranded Accounts

A study from Retirement Clearinghouse and Boston Research Technologies explores the scope of the mobile workforce missing participant problem with retirement plans.

The study found 11% of stranded accounts had a stale address, and there were 1.42 stranded accounts per participant. Thirty-one percent of these accounts had balances less than $10,000, and 73% had less than $100,000.

One-third of participants in the survey learned of an account they did not realize they had—50% of these were Millennials.

According to the study report, the strongest predictor of an account not being lost was the respondent’s knowledge of how to contact the company holding the account; accounts held by respondents who reported being able to do this were almost seven times less likely to be lost.

Who has stranded accounts?

Low income households are twice as likely to have a stale address: 18.7% of terminated participant accounts associated with participants with household income below $50,000 had a stale address, compared with 9.1% of accounts of participants with household income above $50,000, the study showed.

In addition, Millennials were more likely to have stranded accounts; 66% of missing participant account holders are Millennials (15.6% of Millennial stranded accounts had a stale address), 20% are Gen Xers (8.5% of Gen X stranded accounts had a stale address), and 14% are Baby Boomers. Spencer Williams, chief executive officer of Retirement Clearinghouse, notes that Millennials change jobs a little more frequently while they search for the right career path. At the same time, the steadily increasing adoption of auto enrollment in 401(k) plans means that by the time they are 30, they might have been auto-enrolled in three accounts or more.

Seventy-eight percent of missing participant account holders are employed—meaning they could have a new retirement plan to which they could roll over their stranded balances. Sixty percent of participants in the survey would prefer an automated process to update address or consolidate their stranded accounts in their active plan, and 23% would utilize a lost and found database.

What can be done about stranded accounts?

The report suggests that, as records grow stale quickly, plan sponsors should implement a periodic program to update mailing addresses. When large planned distributions are to occur, a more rigorous search is prudent. As a best practice, encourage retirement account consolidation to eliminate redundant accounts that can go stale quickly, the report adds.

A demonstration provided by Retirement Clearinghouse to PLANSPONSOR showed that in just more than 30 years, total cashouts could reach $282 billion, and rollovers to other qualified plans would be only $14.7 billion among 8.4 million participants. Its analysis did not include appreciation, so these amounts would be larger if average returns were included. Williams explained that his firm’s automatic portability solution would use the demographic data from a rollover, send it to recordkeepers to see if there is a match in their system and if one is found, automatically roll the employee’s account to his new plan.

The demonstration showed that in just more than 30 years, under auto-portability, cashouts would be reduced to $144.3 billion, and rollovers would be $133.5 billion among 77.5 million participants.

Followup results from its auto portability solution were reported last year and showed 15% of participants with matched accounts responded to the roll-in offer. Ninety-one percent of the responding participants gave their consent to the transaction and had their savings consolidated in their active-employer plan. Only 9% of participants opted out of the program, with a majority of them choosing to cash out their accounts.