GAO Delves Into IRA Dispositions

By Arthur D. Postal
InsuranceNewsNet

WASHINGTON – Billions of dollars in 401(k) accounts are forcibly transferred into individual retirement accounts (IRAs) when employees leave their workplaces. Current law permits those billions to be poorly invested for the long term, according to a Government Accountability Office (GAO) study.

As a result, the GAO is making several recommendations to Congress to ensure that IRA beneficiaries get the maximum return on their investments. These recommendations include amending the law to permit transfer of the funds outside of the current, very conservative default investments.

The GAO explained that fees for handling forced transfers of funds in 401(k) accounts into IRAs “far outpaced returns” to beneficiaries.

The problem mainly stems from the fact that the vested balances of low-wage workers and young workers who tend to change jobs frequently may often fall below the required $5,000 vested balance needed to prevent forced transfers into low-yielding, so-called “default” accounts.

The GAO also found that a provision in current law allows a plan to disregard previous rollovers when determining if a balance is small enough to force out. For example, the GAO said, 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.

The use of forced-transfer IRAs is common among 401(k) plans, the GAO found, with one annual industry survey showing that about half of active 401(k) plans force out separated participants with balances of $1,000 to $5,000.

In addition, the GAO said, Social Security Administration (SSA) data found that from 2004 through 2013, separated employees left more than 16 million accounts of $5,000 or less in workplace plans. These plans had an aggregate value of $8.5 billion.

The GAO is suggesting the repeal of a provision of current law that allows plans to disregard rollovers when identifying balances eligible for transfer to an IRA.

Among other recommendations, the GAO suggests that the Department of Labor create a task force to explore the possibility of establishing a national pension registry. The two agencies, however, found problems with some of the GAO recommendations.

The GAO found problems with the current system, saying 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.

“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 said it found in studying the issue.

Second, the GAO said, maintaining communication with a former employer’s plan can be challenging if companies are restructured, resulting in plans becoming terminated or merged and renamed. The GAO said it also found that 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.

“Although the Social Security Administration provides individuals with information on benefits they may have from former employers’ plans, the information is not provided in a consolidated or timely manner that would be useful to recipients,” the GAO said.

Other nations are doing a much better job than U.S. agencies in dealing with the issue, the GAO said.

In its studies of how six countries dealt with the issue, the GAO said those nations use forced transfers that help preserve account value and provide a variety of tracking tools referred to as pension registries.

"For example, officials in two countries told GAO that inactive accounts are consolidated there by law, without participant consent, in money-making investment vehicles,’ the report said.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

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