Abandoned Retirement Accounts: The Downside of Automatic Enrollment?

On this episode of The Long View, Dr. Anita Mukherjee, associate professor in risk and insurance at the Wisconsin School of Business at the University of Wisconsin at Madison, talks of abandoned retirement accounts, wealth inequity in retirement, and more.

Here are a few excerpts from Mukherjee’s conversation with Morningstar’s Christine Benz and Jeff Ptak:

How Do You Know When a Retirement Account Has Been Abandoned?

Christine Benz: I want to follow up on the abandoned retirement accounts. You co-authored a paper on that topic. First off, could you talk about how you gauged abandonment? Because it seems like a lot of people, myself included, might really choose to tune out of their retirement accounts for long periods of time. So how did you know that something had really been left probably inadvertently?

Dr. Anita Mukherjee: It’s a great question because this is something we had to define in some ways in the paper. This is co-authored with Shanthi Ramnath and Lucas Goodman, both economists in policy areas. And this paper, we defined abandonment by looking at people who failed to meet their required minimum withdrawals for at least three years in a row. Basically, with retirement savings, you’re allowed to accumulate them tax-free. But at some point, you have to withdraw them and pay taxes on them. And so that required a minimum distribution—usually hits at age 70. Now it’s at age 72. It will be age 75. But if at that point, we see people failing to withdraw their savings for one, two, or three years—in the paper we even look at up to 10 years—that’s when we start to categorize you as maybe you’ve abandoned these savings and you’re not planning to withdraw them at all.

Abandoned Assets in a 401(k)

Jeff Ptak: What happens to assets that have been abandoned in a 401(k) plan? What responsibilities does the plan sponsor have to reunite account owners with their accounts?

Mukherjee: This is a great question. It’s actually a muddy one. So, what happens to assets that have been abandoned? In principle, they should stay with the plan if they’re at least $5,000. And then at some point, if the plan determines that you have abandoned them, then they can send them to the state through a process called escheatment where they say, look, this is abandoned property. We’re not holding on to it anymore. It should be the state’s responsibility to then take it over and find the rightful owner. De facto, like the actual rules that the plan sponsors have to try and reconnect owners with their accounts is not very much. And there’s a lot of variation across plans and how much they do. At minimum, they have to send you notices to your last known mailing address. But many plans do much more, like they have staff that will Google you and try to locate you. But really, they just have to go by what you have given them, which is your address, maybe your phone number, and they give you repeated mailings there. But if you’ve moved out of state, or if you’ve moved even houses, those mail communication may not come to you. And it’s really nobody’s fault legally at that point.

How States Reunite People With Abandoned Retirement Accounts

Benz: How do the states get involved? In the paper, you talked about how a couple of different states, I think the examples were Wisconsin and Massachusetts, have taken varying approaches to helping reunite people with their abandoned retirement plan assets. Can you talk about that dimension?

Mukherjee: Some states when you have unclaimed property, like Wisconsin’s one of these where they will, if they see you as a taxpayer in the state, they will just automatically send you a check. So, using Social Security numbers, they will understand that OK, this person has unclaimed property, I know where this individual lives, because they just filed taxes. So, they’ll just send a check that automatically reunites that unclaimed property with the owner. In most states, however, like Massachusetts, and really all others, the property goes to the central unclaimed property fund. And then, they try to reunite people by putting in names in newspapers I think a couple times a year. There’s a large list of names that are published in state newspapers saying these individuals have unclaimed property. Every state has a searchable database by which you can go in and see if you have unclaimed property. So, there are ways that states try to help. But I think the problem with particularly these retirement accounts is that most of them don’t end up in unclaimed property to begin with. I think the stuff that is an unclaimed property is really interesting. And there’s such a large variety of assets there. But as far as retirement plans go, mostly, they stay with the plans that they were originally in. They don’t end up being sent over to unclaimed property departments.

Abandoned Retirement Accounts: The Downside of Automatic Enrollment

Ptak: One of your team’s conclusions from this research was that defaulting participants in new plans through automatic enrollment seems to be exacerbating the problem of abandoned accounts. Can you expand on that?

Mukherjee: I should pause for a second, and maybe talk about the motivation more generally for this paper, and which links to this. I think a big motivation is just that individuals today have more and more jobs as they enter retirement. They’ve experienced more and more jobs, and each of these jobs may have had retirement plans. And so, the question is, really, do people pay attention and consolidate and manage their various retirement accounts? It’s much more fragmented now than it might have been decades ago, where individuals just had one job and one pension, or one main account to manage. Now, I think the average individual entering retirement has had 12 jobs with retirement accounts. And so, the question is, do you really know about all of them? Do you manage them?

And so when we’re looking at the automatic-enrollment aspect, one of the huge, huge pushes that has been very successful in raising retirement savings has been automatic enrollment, where employers from day one of you joining a job will default you into some kind of savings. So it’s cut out of your paycheck and into some kind of a 401(k) or 403(b) plan where you’re saving for retirement. And what we find in the paper is at least for the lower balances, where people are leaving behind savings from an old job between $1 and $5,000, we find that a lot of those types of plans seem to have abandoned rates at, I think it was close to 30%. And we think a lot of the problem might stem from people never even knowing that they were in a retirement account. So clearly, automatically enrolling people is beneficial in the sense that people now have savings, at least passively, that they’re accruing into retirement. But a downside, at least as people job hop is that you’re getting these payroll deductions for benefits that you might not even know about.

And when we think about people not claiming these later in life, it’s a little bit different than not claiming something like unemployment insurance. It’s your own savings that were cut from your paycheck that you’re not accessing. And so, we think defaults are clearly important. They play a big role in getting people engaged with retirement saving. But we have to be a little bit careful about it, especially for people with smaller balances from maybe short-term jobs where maybe the individual didn’t have the attention or the financial knowledge to really understand their own benefits. And these savings might end up lost forever.