The DOL Retirement Accounts Lost and Found Database Should Do Much More to Facilitate Retirement Account Consolidation

By Catherine Reilly

The average worker can expect to hold 13 different jobs during their career. Job changes expose a weakness in the current 401(k) system, because they increase the risk of cash-outs or lost accounts, reducing savers’ retirement readiness. Between 33 and 47% of retirement plan participants cash out all or part of their retirement savings after a job change, leading to an estimated $60–$105 billion in lost savings each year. Furthermore, about 4.5% of issued retirement checks each year go uncashed, indicating that the recipients have probably lost track of their accounts.

To address this problem, SECURE 2.0 directs the Department of Labor (DOL) to establish a Retirement Savings Lost and Found online database that savers could use to locate their accounts. On November 18, 2024, the DOL announced that it would start to request data from retirement plan administrators to launch a new database by December 29, 2024, as required by law.

One of the reasons people may lose track of their accounts is that the current system for transferring retirement savings to a new employer’s plan is so cumbersome. To transfer retirement savings to a new employer’s plan, a worker must first call the previous provider to request a paper check, which they then must mail to their new plan provider. This process can typically take several weeks. Too many plan participants fail to transfer and consolidate their retirement assets, and consequently have multiple retirement accounts.

In addition to the risk of losing track of the accounts, this is likely to increase costs and lead to suboptimal asset allocations. Furthermore, retirement plans are increasingly offering products that allow participants to convert their saved balances into a lifetime income stream. However, participants whose retirement assets are spread across multiple retirement plans are likely to be less willing and able to take advantage of lifetime income options.

As one potential solution, Shlomo Benartzi has offered the Australian model, where the employee can decide which retirement plan to direct contributions to, to create a “lifetime account.” Australia has, indeed, been very successful in promoting account consolidation, and 78% of retirement savers now have all their assets consolidated in one retirement plan or “Super.”

However, this consumer-driven approach also comes with pitfalls. Because consumers are now the decisionmakers for which retirement plan to use, the Super funds spend considerable sums on consumer advertising. Possibly because of this, fees in Australia are comparatively high: The average total cost for an Australian retirement saver in the default fund is 1–1.5%. By contrast, participants in large U.S. employer plans pay an average total cost of only about 0.2%.

It is possible to embrace the positive aspects of the Australian approach without the potentially higher costs. As part of the drive for account consolidation, the Australian Tax Office has created a hub that savers can use, free of charge, to locate their assets and transfer them electronically to the Super fund of their choice within three days. The U.S. should also aspire to offer an “easy button” to allow participants to transfer their assets frictionlessly to a new employer’s plan if they so wish. This approach would allow for seamless transfers and account consolidation, while keeping plan sponsors’ institutional bargaining power intact and keeping costs under control.

Some progress is already being made. Participants in state automatic enrollment IRA (Auto-IRA) retirement savings programs, such as CalSavers, retain the same account when changing employers. Likewise, pooled employer plans (PEPs), where multiple unrelated employers can use the same plan, should help to make account consolidation easier within the same PEP. The retirement industry has also taken steps to streamline small-balance transfers through the Portability Services Network.

Unfortunately, the DOL’s first iteration of the new Retirement Accounts Lost and Found online database falls far short of achieving any of these goals. Due to concerns about data privacy and cybersecurity, the database will initially rely on plan administrators to provide information only for participants over the age of 65. And because participation is voluntary, some plan administrators may choose not to submit any information, reducing the usefulness of the database.

Once this first version of the database has been launched, the new administration should continue to work with the DOL, the IRS, and Congress to resolve the data privacy and cybersecurity issues to expand the database to include retirement plan participants of all ages and include information from all plan administrators to create a portability hub that connects all the retirement plan providers and allows participants to both locate their savings and easily consolidate them through a secure digital portal. This same connectivity could also be leveraged to implement payments for the Saver’s Match, a new federal matching contribution that will be paid into the retirement plans of eligible savers.

The U.S. already has all the tools to meet the needs of a mobile workforce; we just need to put them to use. About 25% of retirement accounts, worth $1.7 trillion, are left in former employers’ plans. Frictionless account consolidation can be done. It would improve retirement security for savers nationwide by reducing cash-outs and lost accounts, improving investment allocations, avoiding multiple account fees, and supporting the wider adoption of retirement income solutions. Plan administrators would benefit by having fewer but larger accounts to administer. Policymakers would also benefit by improving the retirement readiness of millions of workers and reducing the potential burden on public finances of an aging population.

Catherine Reilly is a Non-Resident Scholar at the Georgetown University Center for Retirement Initiatives and Principal of CM Reilly Associates, an independent consulting firm providing thought leadership and strategy services to the retirement industry globally.

November 2024, 24-07