More Protections Needed for Inactive 401(k) Accounts: GAO

Unclaimed Funds

Who doesn’t dream of a call from the state treasurer informing them that they’re the legal recipients of unclaimed funds?

Yet high fees associated with retirement accounts left unclaimed funds with plans at previous employers can quickly turn dreams to nightmares, especially with smaller accounts.

In late 2014, the Government Accountability Office (GAO) released findings of a study on the subject. It noted that 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 individual retirement account (IRA).

The reports adds that savings in these IRAs are intended to be preserved by the conservative investments allowed under Department of Labor (DOL) regulations. However, GAO found that because fees outpaced returns in most of the IRAs analyzed, these account balances tended to decrease over time.

“Without alternatives to forced-transfer IRAs, current law permits billions in participant savings to be poorly invested for the long-term,” it explained. “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 noted that some 401(k) plan participants find it difficult to keep track of their savings, particularly when they change jobs, because of challenges with consolidation, communication, and information.

The report examined six other countries and their methods for handling unclaimed funds.

“Officials in the United Kingdom said that it consolidates savings in a participant’s new plan and in Switzerland such savings are invested together in a single fund. In Australia, small, inactive accounts are held by a federal agency that preserves their real value by regulation until they are claimed. In addition, GAO found that Australia, the Netherlands and Denmark have pension registries, not always established by law or regulation, which provide participants a single source of online information on their new and old retirement accounts.”

Participants in the United States, in contrast, often lack the information needed to keep track of their accounts. No single agency has responsibility for consolidating retirement account information for participants, and so far, the pension industry has not taken on the task. 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.

In order to fix the problem, GAO recommended that Congress consider the following:

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