In an article two years ago, I mashed-up three reports—one from Pew, a study by the Employee Benefits Research Institute, and a 10+ year old SHRM report—in order to highlight the challenge presented by involuntary distributions from tax-qualified plans that had been rolled over to IRAs and stranded in capital preservation investments.[i]
I concluded saying: “Hopefully, going forward, we can avoid the travesty of IRAs, owned by individuals under age 44, that are invested in money market funds for more than seven years.”
A few days ago, the Government Accountability Office released a report recommending a new bureaucratic “non-solution”—creating a central clearinghouse of retirement plan information in a single view format, a “pension dashboard.”[ii] The single view would facilitate participant efforts to keep track of their various retirement benefits.
Much like the lifetime income projection regulations[iii], a “pension dashboard” would be of value if it really could display all retirement benefits in a consistent manner. Here’s the GAO’s depiction of “single view”[iv]:
However, those who would get comfortable with such access might end up with a suboptimal gaggle of plans—because the median tenure of American workers has been less than five years for the past seven decades, and studies show Americans have averaged 12.7 different employers by the time they reach age 56![v]
And, to paraphrase the TV Show, “The Price is Right,” What’s behind Navigation Pane #1 (Plan #1)? Balance information? Account number? Plan number? EIN? Name of the Plan Sponsor and all current and past participating employers? Recordkeeper contact information? Investment allocations? Allocations based on source (Roth, pre-tax, 401(a), rollover, employer, etc.) If so, will the account balance and other information be periodically updated? What guarantees do participants have so they can rely on the dashboard information as accurate and up to date?
And, which plans are to be captured in that “single view”? Just 401(k) plans? Yes, over 20% of all individual account defined contribution plans belong to an individual who is term vested, but would the dashboard include almost 80% of accounts that belong to an active participant? And, how about defined benefit and defined contribution pensions (active, term vested, in a payout status)? 403(b)? 457? Excess? Traditional IRAs? Roth IRAs? Simple IRAs? SEP IRAs? Rollover IRAs? Contingent annuities and other survivor benefits? QDROs? Health Savings Accounts? IRC §401(h) Accounts? ESOPs?
Much like the lifetime income projection regulations, a “single view” dashboard wouldn’t offer much value unless it captures all retirement plans—and displays all benefits in the same manner.
Much like the lifetime income projection regulations, a “single view” dashboard wouldn’t offer much value unless it captures all retirement plans—and displays all benefits in the same manner.
And, by concentrating all that information on a single site, whether using a process of “live access” or “data centralization,” wouldn’t that pose a significant security challenge? I served a three-year term, 2010-2012, as a member of the DOL’s ERISA Advisory Council. A few years later, I received a notice from the Office of Personnel Management that my personal information had been hacked.
And, by making it easier to keep track of multiple accounts, wouldn’t the dashboard make it easier for individuals to continue multiple accounts—potentially paying multiple administrative fees, and potentially making separate investment decisions for each account that, in the aggregate, conflict with the individual’s desired investment allocation strategy?
Given existing levels of financial literacy[vi], shouldn’t the goal be to encourage asset retention (leakage avoidance), and, where appropriate, assist those who want to aggregate assets and consolidate retirement accounts? In their report, the GAO favorably cites Norway and the Netherlands, where there is an automatic plan-to-plan consolidation, stating: ” A participant’s workplace retirement plan savings can be automatically transferred to their new employer’s plan when they change jobs without them having to take any action.” However, what if there is a gap in time between employers, or if subsequent employment doesn’t include access to an employer-sponsored plan, or worst of all, if the predecessor plan offered superior value and once there is a total distribution and the account is closed, it doesn’t accept rollovers back into the plan?
The Portability Services Network went live in October 2023.[vii] Effective January 1, 2024, SECURE 2.0 Section 304 allows for involuntary distribution and rollover to IRAs for accounts of up to $7,000. So, 2024 should see a culling of accounts from employer-sponsored plans that are newly eligible for involuntary distribution.
Auto-rollover, as currently structured, is suboptimal. Small IRA accounts end up invested in capital preservation funds.
Worse, Roth assets from 401(k), 403(b) and 457 plans are often stranded because once assets are rolled to a Roth IRA, a subsequent rollover to a new employer-sponsored plan is prohibited.[viii]
As a result, Roth assets involuntarily distributed from an employer-sponsored plan often remain invested in capital preservation (typically money market funds) potentially for many years—an investment that is inconsistent with DOL guidance regarding QDIA capital preservation investments which are limited to a maximum duration of 120 days.[ix]
Back to the Future: Reinvigorate the “Conduit IRA”
Have GAO amend its recommendation to direct the IRS to confirm Roth IRAs can serve as a “Conduit IRA” where assets are not commingled with Roth IRA assets that were the result of IRA contributions—essentially reviving the pre-EGTRRA 2001, pre-PPA 2006 “Conduit IRA” process for Roth assets.
It used to be that there was no question about money that had been moved to an IRA over whether it could be moved to a new employer’s plan—always permitted, so long as it was not commingled with other money.
Conduit IRAs were used to store assets until they could be rolled over into a new employer’s qualified plan. There was no specific Code or regulatory provision for creating a Conduit IRA. Rather, simply meeting certain rules, such as not commingling assets from another source and ensuring that the money originated from a qualifying rollover or a direct rollover from a qualified plan or 403(b), were the only requirements.
One other item that indirectly supports re-invigoration of the Conduit IRA for Roth assets is Private Letter Ruling 9505023, issued 2/3/95[x]. Here, the IRS confirmed that even after a total distribution of the account, and rollover of some or all of the monies to an IRA, that the plan could be amended to accept a rollover of those same monies back to the plan. While all of this predates Roth 401(k), it would be highly unlikely that the IRS would make a distinction for Roth assets.
Historically, there was no limit on the sum of contributions transferred to a Conduit IRA from a qualified plan, nor on the number of transactions that may be made. An individual need not roll over 100% of the assets in their qualified retirement plan to the Conduit IRA. Also, there is no time limit on a Conduit IRA. Assets could reside and grow in a Conduit IRA for decades and still be rolled over into a new employer’s 401(k) plan. There is also no minimum length of time that assets must remain in a Conduit IRA. The rules covering the commingling of retirement account assets are found in IRC §408(d)(3)(A)(ii) and in the Internal Revenue Service (IRS) guide to Rollovers of Retirement Plan and IRA Distributions.
Past efforts to revive Conduit IRAs haven’t been a priority for most plan sponsors and IRA trustees since they reduce the number of safe harbor, small account balance stranded IRAs in capital preservation investments—a significant money-maker for IRA trustees.
One remaining issue is that when the account balance meets the involuntary distribution requirements, and there is a plan loan outstanding, the rollover also triggers leakage in the form of a loan default. If the Roth assets languish in a Roth IRA, instead of being rolled over to a new employer’s plan, leakage may be greater even though, effective January 1, 2018, if a plan loan offset is due to severance from employment, instead of the usual 60-day rollover period (potentially from the last day of the calendar quarter following the calendar quarter in which the loan repayment was missed), a participant has until the due date, including extensions, for filing the Federal income tax return for the taxable year in which the offset occurs.
There are options for facilitating rollover of outstanding plan loans when changing employers—but they are generally dependent on the transfer of all other plan assets to a subsequent employer’s plan which provides for multiple plan loans.[xi]
I always appreciate your comments, concerns, criticisms, or questions. Contact me at: jacktowarnicky@gmail.com
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor and consulting roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer No. 2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have tax and legal implications, and you should discuss this matter with tax and legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not and you/others should not use it as a substitute for legal, accounting, actuarial, tax or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein. You (others) should seek advice based on your (their) particular circumstances from an independent tax
[i] J. Towarnicky, The 401k as an ‘Asset Magnet’: Helping to Avoid Rollover Rip-offs: Features of specific value to active and term vested/retired participants include, 7/5/22, Accessed 2/23/24 at: https://401kspecialistmag.com/how-to-make-a-401k-plan-an-asset-magnet/
[ii] U. S. Government Accountability Office (GAO), 401(k) Plans: Additional Federal Actions Would Help Participants Track and Consolidate Their Retirement Savings, GAO-24-103577, 1/18/24 (Released 2/20/24). “GAO recommends that Congress consider granting authority to a federal agency to (1) establish a pension dashboard and (2) establish a system for automatic plan-to-plan rollovers. GAO … also … recommends: (1) The PBGC should assess the feasibility of allowing 401(k) plans to involuntarily transfer small inactive account balances to the PBGC Missing Participants Program, (2) The DOL should explore how to encourage and support the adoption of secure electronic data standards to facilitate rollovers, (3) Treasury should amend the 402(f) notice to clarify options at separation, and (4) The DOL should ensure participants receive “easily-understandable information” about their distribution options and the associated tax consequences.” Accessed 2/23/24 at: https://www.gao.gov/products/gao-24-103577
[iii] J. Towarnicky, The Problems With Lifetime Income Disclosures, A voluntary estimate of lifetime income based on accumulated savings has merit, but …, 5/31/22, Accessed 2/23/24 at: https://401kspecialistmag.com/the-major-problems-with-lifetime-income-disclosures/ See also: J. Towarnicky, More Problems with Lifetime Income Disclosures: They may worsen after updates, 6/20/22, Accessed 2/23/24 at: https://401kspecialistmag.com/more-problems-with-lifetime-income-disclosures/
[iv] U. S. Government Accountability Office, note ii, supra.
[v] Bureau of Labor Statistics, “Employee Tenure in 2022,” 9/22/22. In January 2022, median employee tenure (the point at which half of all workers age 16 or older had more tenure and half had less tenure) was 4.1 years. For workers age 25 or older, median tenure was 4.9 years. Accessed 2/23/24 at: https://www.bls.gov/news.release/pdf/tenure.pdf See also: C. Copeland, Trends in Employee Tenure, 1983–2022, Employee Benefits Research Institute, 1/19/23. “Over the past 40 (or nearly 40 years) years, the median tenure of all wage and salary workers ages 25 or older has stayed at approximately five years.” Accessed 2/23/24 at: https://www.ebri.org/content/trends-in-employee-tenure-1983-2022 See also: H. Hyatt, J. Spietzer, “The Shifting Job Tenure Distribution,” February 2016, Accessed 2/23/24 at: http://ftp.iza.org/dp9776.pdf See also Bureau of Labor Statistics, Number of Jobs, Labor Market Experience, Marital Status and Health For Those Born 1957 – 1964, 8/22/23. “Individuals born in the latter years of the baby boom (1957-64) held an average of 12.7 jobs from ages 18 to 56.” Accessed 2/23/24 at: https://www.bls.gov/news.release/pdf/nlsoy.pdf See also: H. R. Hamel, “Job Tenure of Workers, January 1966” Monthly labor Review, Bureau of Labor Statistics, January 1967. Accessed 2/23/24 at: www.jstor.org/stable/41836645
[vi] A. Lusardi, Financial literacy, and the need for financial education: evidence and implications, 1/24/19, Swiss Journal of Economics and Statistics. “… In the USA, less than 30% of respondents can correctly answer (three questions, one on compound interest, one on inflation and one on investment diversification) by age 40, even though many consequential financial decisions are made well before that age. …,” Accessed 2/23/24 at: https://sjes.springeropen.com/articles/10.1186/s41937-019-0027-5
[vii] A. Umpierrez, Portability Services Network Launches Solution to Reduce Plan Leakage, 11/9/23, Accessed 2/23/24 at: https://401kspecialistmag.com/portability-services-network-launches-solution-to-reduce-plan-leakage/
[viii] Internal Revenue Service, Accessed 2/23/24 at: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
[ix] Employee Benefits Security Administration, US Department of Labor, Default Investment Alternatives Under Participant Directed Individual Account Plans: A Rule by the Employee Benefits Security Administration on 10/24/2007, Accessed 2/23/24 at: https://www.federalregister.gov/documents/2007/10/24/07-5147/default-investment-alternatives-under-participant-directed-individual-account-plans#
[x] PLR 9505023, IRS approves amendment of plan to provide for acceptance of rollover transfers from ‘Conduit’ IRAs, 11/9/94, published 2/3/95, Accessed 2/23/24 at: https://www.taxnotes.com/research/federal/irs-private-rulings/letter-rulings-technical-advice/irs-approves-amendment-of-plan-to-provide-for-acceptance-of/1hc6k?highlight=Private%20Letter%20Ruling%209505023
[xi] J. Towarnicky, Stop Leaks: Plan Loans, 11/29/20, Accessed 2/23/24 at: https://401kspecialistmag.com/how-to-stop-401k-leakage-from-plan-loans/