DOL program to reunite $1.65 trillion of 401(k) assets with plan participants is long, long overdue; it's also little threat to VC-backed startup with overlapping mission -- and big head start

Federal regulators are finally addressing an unconscionable fiduciary breach by the U.S. pension system – the failure to track $1.65 trillion saved by workers, mostly in orphan 401(k) accounts.

The Department of Labor (DOL) is launching a database for employees to find old 401(k) plans – and reclaim them – something the law prevented until passage of the 2022 SECURE 2.0 Act.

“Our goal, which we believe plan sponsors and administrators and their service providers share, is to make sure that workers and their beneficiaries receive all the retirement benefits they earned,” says Lisa M. Gomez, assistant secretary for employee benefits security, in a release.

The scale of the problem is truly vast and has gone largely unnoticed.

Almost 25% of all 401(k) plan assets are unclaimed, according to a 2023 report from 401(k) roll-over start-up, Capitalize. See: Capitalize inks 'deep, multi-year' deals, and $19 million VC round follows.

“Retirement plans lose track of missing participants for a variety of reasons, including incomplete recordkeeping and workers changing jobs. 

"In other cases, workers may lose track of their retirement plans after their former employer goes out of business or when companies merge,” the release states.

Significant consequences

Workers who are oblivious to the assets' absence compound the problem. 

As a result, RIAS and institutions often need to initiate the process, according to John Sullivan, chief content officer of the American Retirement Association, and editor-in-chief of “401(k) Specialist Magazine.” 

“How likely is it [that] a person owed benefits will initiate a search if they don’t know they are owed benefits?” he rhetorically asks in a Feb. 6 article.

Indeed, an estimated 29 million 401(k) accounts, holding around $1.65 trillion remain unclaimed, according to the Capitalize report. See: Stronger and better crafted: the latest 'DOL Rule'.

"The potential consequences continue to be significant ... an individual saver is at risk of missing out on several hundred thousand dollars in retirement savings," the report states. See: 'Portability' is set to boost $9.3 trillion 401(k) system.

For advisors, it's a "win-win” opportunity to connect workers with unclaimed benefits, Sullivan says. 

Just $7 billion in missing retirement benefits have been recovered and reallocated or disbursed since 2017, following efforts by the Employee Benefits Security Association, according to a DoL release.

RIA opportunity

The value of lost accounts is also equivalent to nearly 20% of the total $8.5 trillion managed by RIAs.

As a result, lost 401(k) accounts are not just a fiduciary issue – it is clearly in a client's best interest to gain access to lost investments – but also a business opportunity.

To analyze the issue in more detail, RIABiz's Oisín Breen took part in a short Q&A with Capitalize founder and CEO, Gaurav Sharma.

The DoL did not respond to a request for comment.

Why now?

OB: Why is this something that the DoL is launching now, as opposed to five years ago? Why is there more of a need – or more of a will to launch the database – now? See: Capitalize sees opening to serve RIAs with 401(k) rollover services on heels of DOL fiduciary rule.

GS: Our understanding is this is something the DOL has been interested in for a long time, but [it] required legislative action to make a reality. With SECURE 2.0 passed, the path opened up to start work on this database. We’re excited that the DOL feels they have the resources to work on this now. This is a significant effort not only to stand up initially, but also to maintain indefinitely. 

Competitive threat?

OB: How different is this from what you're doing at Capitalize; is it a threat to your business? See: Capitalize gets $2 million from four top VCs.

GS: While there’s some overlap and common goals between our approaches, the underlying data is somewhat different. We leverage both publicly available data along with our own database built from the thousands of rollovers we perform annually. 

We think the DoL database – as it develops – will be useful for savers especially when used in combination with services like Capitalize. As we’ve laid out in recently published research, rollovers are difficult for many reasons beyond just tracking down a plan administrator. 

There are complex phone calls, forms, faxes, notaries, and other requirements that frequently trip up participants. This lost and found is a potentially useful tool, but doesn’t solve the full problem facing retirement savers like we’re trying to do.

What's the skinny?

OB: Can you give us the skinny, so to speak, on just how long this is likely to take to build, how much investment is likely needed, how many staff, and how long it will take to get right? Do you expect the DOL to get it right? And lastly, is the Dec. 29, 2024 launch date overly optimistic?

GS: The lost and found [database] will take time to become fully operational and may face challenges, such as incomplete or outdated data from 401(k) administrators and record-keepers. 

The December 2024 launch seems plausible; it’s very unlikely to have significant coverage of retirement plans, because the system relies on voluntary updates from these administrators and record-keepers, and [it] only began collecting information recently. 

It’s more likely that the initial launch will have fairly limited information, and [that] the DOL intends to expand its coverage over time as more responses are collected. There will also be continuous maintenance required to ensure information collected previously is still up-to-date. 

Employers can and often do change their retirement plan providers and setups, so information that was true years ago isn’t necessarily true today.

Will vendors comply?

OB: Will retirement plan providers of all stripes and types provide the information the DoL is seeking?

GS: We hope there is robust participation, but it’s hard to say. Since this is a voluntary request, we wouldn’t expect participation to be high, especially in the early days. Over time, this may improve as more employers are aware of this and see the benefits of such a database. 

* The DOL data requests now include only a list of the names and number of plans (Form 5500), the name, employer ID, mailing address and telephone numbers of plan administrators and sponsors (Form 5500), and the name and social security number of unaccounted for plan participants over the age of 65.

* Plan Sponsors or administrators are also requested to provide the DOL database with information when a formerly ‘lost’ plan has been disbursed, or access to it returned to the relevant plan participant.