Small retirement accounts: Issues and options

multiple small piggy banks with a calculator and a ledger.
Editor's note:

This paper was presented at the Building a better retirement system for all Americans event on September 21, 2021. The final draft of the report was uploaded here on November 23, 2021. 

Every new retirement saver starts with a small account. Over time, balances can grow with continuing contributions by savers or employers, investment earnings, and tax benefits. Not all accounts, however, grow very much. Some account balances are cashed out early, while others are eaten away by administrative and management fees. In far too many cases, employees lose track of their past accounts. These situations make retirement planning more difficult and endanger retirement security for millions of households.

As we show in a new paper, the existence of accounts with small balances is an inevitable byproduct of retirement systems, like those in the United States and several other countries, where individualized, employer-based accounts and automatic enrollment provisions are widespread. And of course, not all small balances are undesirable. New savers and those with lower incomes will inevitably have smaller balances, and small retirement benefits are preferable to no benefits.

Nevertheless, public policies that enable people to navigate the problems that small accounts create could help millions of households save more adequately for retirement. Increasing people’s retirement income by just $1,000 a year could also help states and the federal government save several billion dollars that they otherwise would have spent for retiree support programs. However, the problems raised by small accounts are not the same as those raised by inadequate saving. For example, consolidating all of one’s small accounts into one larger account may not be sufficient to generate adequate retirement wealth. On the other hand, those with high income replacement rates from Social Security—that is, lifetime low earners—might have adequate retirement income despite having only a small private retirement account. There is also an important equity component to addressing small accounts, as they are especially prevalent among Black and Hispanic/Latino IRA holders.

Our paper addresses issues raised by small accounts and proposes a range of solutions: extensive reform of the rollover and account consolidation rules, including seven specific changes; reform of the saver’s credit to make it a 50 percent, refundable matching contribution deposited directly into the saver’s account; creation of a national dashboard where it would be easier to find lost accounts and/or a default account consolidation standard that could see the automatic combination of certain accounts; and development of a system where each worker could have a single retirement savings account that moves from employer to employer over the course of their career.

All these reforms will face challenges before they can be fully implemented. Some would fit more easily into the existing system than others. But policymakers should seriously consider all five as ways to reduce some of the complexity and confusion that retirement savers face.
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