Between 2004 and 2013, plan sponsors failed to connect approximately 25 million retirement accounts with their employee owners. Most often, it occurred unintentionally as a result of workers switching jobs.
The Government Accountability Office (GAO) recently outlined challenges that could be inhibiting workers from keeping track of accounts, along with concerns about a lack of guidance with regard to reuniting plan participants with unclaimed property.
“First, we found that individuals who accrue multiple accounts over the course of a career may be unable to consolidate their accounts by rolling over savings from one employer’s plan to the next,” the GAO explains in its report. “Second, maintaining communication with a former employer’s plan can be challenging if companies are restructured and plans are terminated or merged and renamed. Third, key information on lost accounts may be held by different plans, service providers or government agencies, and participants may not know where to turn for assistance.”
The primary cause for concern seems to be a lack of guidance when it comes to locating “separated participants” in order to determine what to do with the 401k savings left behind.
As it stands, workers are responsible for keeping their address up-to-date with employers (including former employers) in order to receive communications about retirement accounts. Workers are also held accountable for responding to said communications.
For those who do not respond, the GAO found “there are no standard practices for the frequency or method of conducting searches” for missing participants. In fact, plan sponsors aren’t obligated in any way to search for unresponsive plan participants, according to the Department of Labor (DOL)—unless plans are terminating.
“Fiduciaries of terminating plans are obligated to search for missing participants, to notify them of the termination and pending distribution of benefits before transferring participants’ unclaimed accounts to an IRA or elsewhere, according to DOL guidance,” the GAO report details. “The guidance further provides that fiduciaries of terminating plans who are unable to locate missing participants may also be permitted to transfer accounts belonging to missing participants, without consent, to a federally-insured bank account or to a state’s unclaimed property fund.”
This is particularly troubling considering 16 of the 25 million abandoned retirement accounts (which total $8.5 trillion in assets) contain $5,000 or less—an amount that could easily disappear entirely under current guidelines.
“For example, accounts with a balance of $1,000 or less can be cashed out of a plan without participant consent; account balances can be reduced by tax withholding and early distribution taxes, or conditionally forfeited by the plan sponsor until the participant emerges to make a claim,” the GAO reports. “Accounts with balances under $5,000, and sometimes those with larger balances, can be forcibly transferred to an IRA, where the account balances may decrease over time as the fees outpace low investment returns.”
To address these issues the GAO is recommending that:
- the Secretary of Labor issues guidance according to ERISA obligations about plan sponsors’ responsibilities to prevent and search for missing participants;
- the IRS Commissioner reviews and communicates to the public about taxation and IRS requirements related to unclaimed retirement accounts and uncashed benefit checks;
- and the IRS Commissioner considers re-instating a letter forwarding program to better enable plan-sponsor communications to reach missing participants through usage of the IRS address database.
“A key element of DOL’s mission is to protect the benefits of workers and families. However, without guidance on how to search for separated participants who leave behind retirement accounts, sponsors may choose to do little more than remove unclaimed accounts from the plan when possible, and workers may never recover these savings,” the GAO concluded.