Your Old 401(k): Out of Sight, Out of Mind and Out of Money

As a Comerica Bank executive with more than 35 years of experience in wealth management, Lisa Featherngill knows how to handle retirement money. But when she left her previous position at Wells Fargo two years ago, she had to figure out what to do with her old 401(k) — and was as flummoxed as any other person changing jobs.

“A lot of times, people don’t know where they’re going to work or if they’re eligible for the 401(k) plan at the new job,” Ms. Featherngill said. “I just didn’t want to think about it, so I left my plan behind.”

As of June, job changers had left behind nearly 30 million 401(k)s or similar retirement accounts worth an estimated $1.65 trillion, according to Capitalize, a technology company that offers an online platform to help transfer 401(k) accounts. But in the aftermath of the pandemic “great resignation,” people who have left small 401(k)s with their former employer can find those accounts seriously diminished — or even completely drained — when plan sponsors roll that money over to individual retirement accounts with high fees and low-yielding investments.

Since 2001, this kind of transfer could happen to any 401(k) or similar workplace account with a balance between $1,001 and $5,000. But starting Jan. 1, provisions in the Secure 2.0 retirement act will raise the balance for an automatic rollover to $7,000 — an adjustment that will expose an estimated 800,000 additional workers with low-balance accounts to involuntary rollovers. About 8.1 million of these forced I.R.A.s already exist.

“When the rollover limit goes to $7,000, it’s going to be somewhere north of $1.5 trillion that are being frittered away by this inefficient system,” said Spencer Williams, chief executive officer of Retirement Clearinghouse, a firm that helps transfer old 401(k)s to workers’ new plans.

The law governing retirement accounts allows the sponsoring employers to have the plan administrators move inactive, small-balance 401(k)s and similar defined contribution accounts out of their plans in order to escape the cost of record keeping and sending notifications to ex-employees who may not have left a forwarding address.