Don’t forget your retirement account or your heirs will pay
In 2006, Congress passed the Pension Protection Act that changed the world of 401(k) plans and the retirement savers they serve. Of the many things this new law has encouraged, automatic enrollment has had perhaps the most beneficial impact. It has increased the percentage of people saving for retirement.
But a recent presentation by the Federal Reserve Bank of Chicago may have revealed the dark side of auto-enrollment.
Retirement professionals often associate the phrase “set it and forget it” with auto-enrollment. While making it easier for employees to start saving in their company retirement plan (the “set it” part), the “forget it” part particularly appeals to plan members who prefer not to have to give too much money. Pay attention to the financial requirements associated with managing their retirement investments.
Unfortunately, they can take that “forget it” part too far.
“It has raised concern among policymakers that people might forget or lose track of these accounts,” said Shanthi Ramnath, senior economist at the Federal Reserve Bank of Chicago, when speaking at the conference. the Federal Reserve Bank of Chicago event on October 18.e.
Ramnath looked at tax return data to determine the share of abandoned IRA accounts. (She noted that it’s much harder to collect similar data for 401(k) plans.) And while her 0.2% and 0.4% results show “not a lot of abandoned accounts” , she says, “They’re still a substantial part of someone’s income.
David John, Senior Policy Advisor, AARP Public Policy Institute, says, “A recent study found that the likelihood of an abandoned account being recovered within ten years of the participant’s age 72 – the age at which people must start receiving distributions from IRAs – increases with account balance, capping at around 60% for accounts above $3,000. Small accounts that are involuntarily transferred into an IRA are about 10 times more likely to be abandoned than small accounts that are not involuntarily transferred.
“For a living senior, a missing account means they have money they don’t know they could use to enjoy their retirement, pay for long-term care, or leave an inheritance to loved one,” says Josh St. Laurent, founder and CEO of Wealth In Yourself in South Lake Tahoe, California. “For the heirs, the problem is trying to prove who the owner would have wanted as the beneficiary of the account. Generally, if you forgot your account, you also forgot your beneficiaries. So now your family must “fight” through probate to get back the money that once belonged to you. »
Forgetting about your retirement account is easier than you think. Remember, automatic enrollment means you don’t have to decide whether to join your company’s retirement plan or how much you’ll save. It’s easy to forget you even have a 401(k). And, if you change jobs frequently, it’s easy to overlook something that’s only a small amount of money.
“About seven percent of pension plan participants are lost, which means they can’t be found by the holder of their money,” says John. “More people simply forget where their savings went, or even that they had previous savings. This is especially true for accounts from early in people’s careers. »
If you don’t leave your former employer with specific instructions on what to do with your 401(k) account, what choice does the plan sponsor have?
“For accounts with assets between $1,000 and $5,000, they are often required to open an Individual Retirement Account (IRA),” says Matthew Compton, Managing Director of Retirement Services at Brio Benefit Consulting, Inc. . At New York. “This balance would remain until claimed by the participant or beneficiary. In some cases, these balances may be allocated to the state until recovered. Needless to say, this is not an ideal situation for the plan member or its beneficiary.
Research confirms this trend. Ramnath found that “people whose IRAs are created with this rollover are less likely to update their address, so we think they’re less likely to find that account later and less likely to take that RMD.”
In some cases, the IRA custodian will issue the Required Minimum Distribution (RMD) even if the owner does not request it, further complicating matters.
“When older participants drop accounts in a former employer’s plan, it can pose challenges in terms of ensuring that RMDs are made as they should be,” says Kit Gleason, VP/Sr. Relationship Manager at First Bank & Trust in Sioux Falls, South Dakota. “Most suppliers will issue the distribution, but the check will not be cashed, which will put the sponsor and the supplier back in the cycle of missing participants.”
401(k) plan sponsors must make a diligent effort to distribute RMDs to plan participants. They face the same obstacles as IRA depositories.
“Abandoned accounts are an industry-wide problem,” says Jason Grantz, general manager of Integrated Pension Services in Highland Park, New Jersey. “Employers are required to try to track down these former employees and get positive instructions from them on what to do with their retirement funds. And that can be difficult for employers, especially over time, and for heirs when trying to settle the estate or when they have to do difficult things like get copies of death certificates and so on.
Before your heirs even have to prove their right to access funds, they must first know that there are funds they are entitled to access.
“The biggest problem is acknowledging that the account even exists,” says Tim Wood, a principal at Foster & Wood Investment Fiduciaries in Lake Oswego, Oregon. “I’m not sure anyone lists their former employers in their will to provide their heirs with clues as to where the assets might be. Also, when people move, in my experience, they very rarely notify their former employer of their new address to ensure quarterly statements are received.
Is there anything like a central repository of information that might provide a clue to forgotten retirement accounts?
“If you don’t keep track of your personal assets, that’s always a problem for survivors,” says Dick Billings, senior records and compliance specialist at PCS Retirement, LLC in Philadelphia. “Plan sponsors are currently required to file IRS Form 8955-SSA with Social Security if they are not applying for their benefits. When a participant, or their survivor, applies for their Social Security benefits, they will be informed of the existence of this past benefit. Here is a common problem. Between termination and receipt of Social Security benefits, employees receive their old 401(k) balance but forget about it (likely because it was a small amount). Benefits are then reclaimed because Social Security informs survivors that there is an old balance.
When in doubt, the consequences of forgetting your retirement plan can be compounded. This can cost your heirs part of their inheritance.
“If older workers forget they are entitled to a plan distribution and a plan sponsor cannot locate them, even after following all recommended steps outlined by the IRS and DOL to locate missing participants to the plan, some plans will provide that their benefits under the plan are forfeited, subject to restoration if the participant later requests a distribution, while other plans will provide that the account balance be transferred to the competent jurisdiction, although this is a controversial option that the DOL believes should be preempted by ERISA,” said Marcia S. Wagner, managing member of the Wagner Law Group in Boston. “After a participant’s death, the default beneficiary, after the participant’s spouse, may be the participant’s estate (although a plan may provide for a ranking of beneficiaries after the spouse, such as parents, children , siblings, etc., with the participant’s estate as the last option, and in some cases even if the participant’s estate is the default beneficiary), an estate will not be opened after the participant’s death, a circumstance which may not be explicitly addressed by the plan If a participant dies after the date on which benefits under the plan should have commenced for him, then a portion of the participant’s benefits will be paid to the estate as income at in respect of a deceased person, only the remainder being available to the beneficiaries In addition, the heirs may face practical problems: the plan may have been terminated or the promoter of the plan was acquired by another company and the old employer’s plan merged with the new employer’s plans. Depending on the relationship, a participant’s heirs may have difficulty proving the relationship, and it may be difficult for some relatives to obtain a copy of the participant’s death certificate.
Gleason remembers going through such a Pandora’s box. “The biggest problem I see for heirs is simply identifying and locating accounts left behind by their loved one,” she says. “I recently worked with a participant whose mother had passed away and had left funds in a former employer’s plan. She only knew that because they had discussed it before her mother died. Her mother’s former employer had been taken over by a company that had recently become a client, but no balance or file had been sent to us in her mother’s name. The daughter knew there had been a balance and it had not been distributed to her mother, so she continued to call anyone who might have been associated with the account but was getting nowhere. I had sympathy for his situation, so I reached out to the plan’s old TPA to see if they had any information and we were eventually able to locate the account, which had been forced into an IRA before the plan did. be transferred to us. It shouldn’t have been that difficult, so hopefully the proposed national database might make it a bit easier in the future, although that remains to be seen.
It doesn’t help that the current rules present barriers to consolidating your IRA assets. It’s not impossible, but it looks like a maze that most people might find intimidating.
“One of the reasons for losing accounts is that a forest of often well-meaning regulations and industry practices make it very difficult for people to transfer their retirement savings from one employer to another,” says John. “While a finance professional can often overcome these obstacles, it is extremely difficult for someone else to do so.”
Policymakers talk about the concept of a “universal IRA,” whereby an employee’s retirement plan would automatically follow the employee from one employer to another.
“It requires some coordination between employers,” says Enrichetta Ravina, senior economist at the Federal Reserve Bank of Chicago. “A centralized system would certainly be a good thing. There would be some cost to implement it, but I would say the cost would be lower compared to the potential benefits. »
This idea is not new. It was talked about as early as 2010, but the wheels of progress, even with bipartisan support, roll slowly at best.