401(k) rollovers fraught with challenges

A new report by Capitalize, a tech platform focused on locating and transferring retirement assets, highlights numerous significant hurdles that retirement savers face when attempting to roll over their 401(k) accounts.

According to the report titled "Stuck In The Past: Why 401(k) Rollovers Remain Outdated and Painful," nearly 80 percent of savers struggle to complete the process without external assistance, with 43 percent forced to deal with physical paper checks.

“Our goal in sharing this data is to highlight the heavy burden placed on savers and their financial institutions to find and transfer retirement assets through the outdated 401(k) rollover process,” Gaurav Sharma, CEO and co-founder of Capitalize, said in a statement unveiling the findings. “This process remains a problem for many in the retirement savings system and leads to suboptimal outcomes across the board.”

Across the broad retirement savings landscape, Capitalize estimates nearly 70 million Americans had saved over $11 trillion in 401(k) and defined contribution plans by the second quarter of 2024. It projects that over 10 million 401(k) rollovers will occur this year, accounting for roughly $1.1 trillion in assets transferred to IRAs or new employer-sponsored plans.

Despite this growth, the report emphasizes that the rollover process remains inefficient. According to the findings, only 22 percent of savers can complete a rollover without help, and the average unassisted rollover takes nearly two months to finalize, dwarfing the five days needed for ACH transfers and 10 days for ACATs transfers.

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The data also revealed that 54 percent of savers did not initially know where their legacy 401(k) was located, and 61 percent lacked the necessary login details to access their accounts online. That friction could be translating into massive waste in the retirement system, as Capitalize estimates $1.65 trillion in retirement assets were left languishing in 29.2 million orphan 401(k) accounts as of May 2023.

Workers typically wait close to four years after leaving a job before completing a rollover, which raises concerns about account management and asset loss over time. The majority of people who attempt an unassisted rollover struggled to grasp how retirement accounts are taxed, Capitalize added, leading to unintended tax consequences for nearly one in five users who try the maneuver.

“By surfacing the struggle of savers and comparing the process to other money movement methods, we hope to spotlight the opportunity for a simpler and more saver-friendly transfer process,” Sharma said.