Summary
The U.S. retirement savings landscape places a great deal of responsibility on individuals. One of the most basic responsibilities is keeping track of individual retirement accounts through job switches, shifts in savings programs, and other changes that can occur over decades of working. If individuals fail to keep track of these accounts over their lifetime, they may abandon or forget the accounts, losing the money in them.
There are many reasons why a retirement account might be abandoned. For example, some people may simply forget that the account exists. This is especially true for an aging population, where cognitive decline among older retirees could impair their recall ability. Alternatively, some people may intentionally ignore their accounts because of the hassles associated with managing it, particularly when the account has a small balance.
Despite increasing concerns among policymakers about retirement account abandonment, basic facts about this issue to date had been largely unknown. In a recent paper, the authors attempt to fill this gap in knowledge by analyzing Individual Retirement Accounts (IRAs), which, similar to employer plans like 401(k)s, are an important tool used to accumulate private retirement savings. They find that for a recent cohort of retirement-age individuals, 0.4% abandoned a total of $66 million. The median value of an abandoned account was around $5,700. Importantly, accounts with smaller balances were ten times more likely to be abandoned over someone’s lifecycle.
Moving forward
The share of abandoned retirement accounts is currently small, but has been growing over time. While the results from Goodman et al (2022) are specific to IRAs, there are broader lessons that could apply more generally to polices aimed at strengthening retirement security. Interventions such as auto-enrollment, which defaults employees into contributing to an employer retirement plan, coupled with more frequent job changes could contribute to a proliferation of small-balance employer accounts. However, the data indicate that small-balance IRAs are more likely to be abandoned.
Drawing on the previous success of auto-enrollment at increasing employer plan participation, policymakers have aimed to replicate those results more broadly. Federal and state proposals include automatically enrolling employees without access to employer plans into an IRA. However, to ensure that retirement security is ultimately achieved, new auto-enrollment policies should be considered concurrently with policies that alleviate or prevent account abandonment in retirement.
Policy considerations
Strengthening retirement security is a perennial policy concern that has led to numerous proposals for encouraging savings. In the past, some have argued for an overhaul of the U.S. retirement savings system by creating a single account that would follow individuals from job to job. Portability of accounts could ease account management through consolidation and could have the added benefit of reducing account abandonment.
A more targeted proposal aimed at addressing issues related to small-balance accounts suggested centralizing information about accounts. Information about retirement accounts could be reported to a single entity, which among other benefits, would then allow individuals to track their accounts in one place.
Finally, given the complex nature of the retirement system, furthering overall financial literacy could help alleviate some of the costs associated with managing accounts. Facilitating a more participatory approach to account ownership through an increased understanding of accounts might make accounts more relevant throughout a person’s lifetime and therefore less likely to be abandoned in retirement.
Note
The research of Goodman et al. (2022) described in this brief was conducted while one of the authors of the research was an employee at the U.S. Department of the Treasury. In their paper, the authors state that the findings, interpretations, and conclusions express in their paper are entirely those of the authors and do not necessarily reflect the views or the official positions of the U.S. Department of the Treasury, the Federal Reserve Bank of Chicago, or the Federal Reserve System. The authors also state that any taxpayer data used in the research described in this brief was kept in a secured Treasury or IRS data repository, and all results have been reviewed to ensure that no confidential information is disclosed.
