Forced plan cash-outs into individual retirement accounts (IRAs) could leave billions to be poorly invested for the long-term, according to the Government Accountability Office (GAO).
The report was produced at the request of Sens. Tom Harkin (D-Iowa) and Elizabeth Warren (D-Mass.) of the Senate Health Education Labor & Pensions (HELP) committee. It considers what happens over time to the savings of participants forced out of their plans (specifically those who, at the point of termination have vested balances of $5,000 or less), the challenges 401(k) plan participants face keeping track of retirement savings in general, and how other countries address similar challenges of inactive accounts.
When a participant has saved less than $5,000 in a 401(k) plan and changes jobs without indicating what should be done with the money, the plan can transfer the account savings — a forced transfer — into an IRA. Savings in these IRAs are intended to be preserved by the conservative investments allowed under DOL regulations. However, GAO found that because fees outpaced returns in most of the IRAs analyzed, these account balances tended to decrease over time.
GAO also found that a provision in law allows a plan to disregard previous rollovers when determining if a balance is small enough to force out. For example, a plan can force out a participant with a balance of $20,000 if less than $5,000 is attributable to contributions other than rollover contributions.
GAO recommended that Congress consider:
(1) amending current law to permit alternative default destinations (other than money market funds, the current force-out safe harbor default) for plans to use when transferring participant accounts out of plans, rather than the use of money market funds; and
(2) repealing a provision that allows plans to disregard rollovers when identifying balances eligible for transfer to an IRA.
GAO also recommended that the Social Security Administration’s Acting Commissioner make information on potential vested plan benefits more accessible to individuals before retirement.
Additionally, the GAO noted that retirement plan participants may have difficulty keeping track with their retirement savings accounts, particularly when they change jobs. Since key information about lost accounts may be held by different plans, service providers or government agencies, and since participants may not know where to turn for assistance, GAO recommended that the DOL convene a task force to explore the possibility of establishing a national pension registry. In response, the DOL agreed to evaluate the possibility, but noted it lacks the authority to require reporting of the information needed for a registry or to arrange for the consolidation of retirement account information from multiple agencies.
DOL disagreed with the recommendation to expand the investment alternatives available under the safe harbor for plan sponsors using forced transfers, noting that the limited investments under the safe harbor are appropriate because Congress’ intent for the safe harbor was to preserve principal transferred out of plans, and that, given the small balances and the inability of absent participants to monitor investments, the current conservative investment options were a more appropriate way to preserve principal.
GAO's review included projecting forced-transfer IRA outcomes over time using current fee and return data from 10 providers and interviews with stakeholders in the United States, Australia, Belgium, Denmark, the Netherlands, Switzerland and the United Kingdom.
The six foreign countries GAO reviewed address challenges of inactive accounts by using forced transfers that help preserve account value and providing a variety of tracking tools referred to as pension registries. GAO noted that, “Without a pension registry for individuals to access current, consolidated retirement account information, the challenges participants face in tracking accounts over time can be expected to continue.”
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