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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
November 2014:
401(k) Plans:
Greater Protections Needed for Forced Transfers and Inactive Accounts:
GAO-15-73:
GAO Highlights:
Highlights of GAO-15-73, a report to congressional requesters.
Why GAO Did This Study:
Millions of employees change jobs each year and some leave their
savings in their former employers' 401(k) plans. If their accounts are
small enough and they do not instruct the plan to do otherwise, plans
can transfer their savings into an IRA without their consent. GAO was
asked to examine implications for 401(k) plan participants of being
forced out of plans and into these IRAs.
GAO examined: (1) what happens over time to the savings of
participants forced out of their plans, (2) the challenges 401(k) plan
participants face keeping track of retirement savings in general, and
(3) how other countries address similar challenges of inactive
accounts. GAO's review included projecting forced-transfer IRA
outcomes over time using current fee and return data from 10
providers, and interviews with stakeholders in the United States,
Australia, Belgium, Denmark, the Netherlands, Switzerland, and the
United Kingdom.
What GAO Found:
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). 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. 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.
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. First, 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. 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. 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 six countries GAO reviewed address challenges of inactive accounts
by using forced transfers that help preserve account value and
providing 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. 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.
What GAO Recommends:
GAO recommends that Congress consider (1) amending current law to
permit alternative default destinations for plans to use when
transferring participant accounts out of plans, and (2) repealing a
provision that allows plans to disregard rollovers when identifying
balances eligible for transfer to an IRA. Among other things, GAO also
recommends that DOL convene a taskforce to explore the possibility of
establishing a national pension registry. DOL and SSA each disagreed
with one of GAO's recommendations. GAO maintains the need for all its
recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-15-73]. For more
information, contact Charlie Jeszeck at (202) 512-7215 or
jeszeckc@gao.gov.
[End of section]
Contents:
Letter:
Background:
Current Law and Regulations Allow Sponsors to Force Certain
Participants Out of 401(k) Plans, Which Can Result in Reduced
Retirement Income:
Keeping Track of 401(k) Plan Accounts Can Be Difficult Because of
Challenges with Consolidation, Communication, and Information, but SSA
Is in a Position to Help:
Other Countries Have Taken Actions to Protect Forced Transfers and
Track Retirement Accounts:
Conclusions:
Matters for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Use of Forced-Transfer IRAs:
Appendix III: Projected Outcome of a $1,000 Balance Left in a Forced-
Transfer IRA for 30 Years:
Appendix IV: Projected Vested Retirement Savings of a Low-Wage 401(k)
Plan Participant Given Pessimistic, Moderate, and Optimistic
Assumptions (Table):
Appendix V: Example Notification of Plan Forced-Transfer Policy:
Appendix VI: Selected Reporting and Disclosure Requirements at
Participant Separation and Certain Plan Events (Table):
Appendix VII: Relevant Features of Pension Systems in the Six
Countries Selected for This Report:
Appendix VIII: Comments from the U.S. Department of Labor:
Appendix IX: Comments from the Social Security Administration:
Appendix IX: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Brief Summary of Federal Agencies' Roles Overseeing Forced
Transfers of Separated 401(k) Plan Participants:
Table 2: Terminating 401(k) Plans Have More Options Than Active Plans
When Forcing Out Participants Who Do Not Elect a Distribution Option:
Table 3: Median Years of Tenure with Current Employer, by Age (January
2014):
Table 4: Federal Agencies or Entities That Can Help Former
Participants Locate 401(k) Accounts:
Table 5: Characteristics of Forced Transfers in Three Countries and in
the United States:
Table 6: Attributes of Pension Registries Used in Four Countries in
2014:
Table 7: The Projected Balance of a $1,000 Forced-Transfer IRA after
30 years, Given 19 Combinations of Account Fees and Investment Returns
for 10 Providers:
Figures:
Figure 1: Options for Forcing Out a Separated Participant Depend on
the Participant's Vested Balance:
Figure 2: A $1,000 Forced-Transfer IRA Balance Invested in a Target
Date Fund Could Grow Over 30 Years but Declines When Invested
Conservatively:
Figure 3: 401(k) Plan Savings Rolled into a New Employer's Plan Are
Not Protected by the $5,000 Cap on Forced Transfers:
Figure 4: Disregarding Rollover Balances Can Result in Low-Wage
Workers' Vested Balances Falling Below the $5,000 Cap on Forced
Transfers:
Figure 5: Projected Growth of $19,500 Balance Invested in a Forced-
Transfer IRA or Left in a 401(k) Plan:
Figure 6: A Worker's Accumulation of Multiple Accounts for Retirement
Savings:
Figure 7: Contents of the Notice of Potential Private Retirement
Benefit Information That Could Be Helpful to Individuals Looking for
Missing Retirement Accounts:
Figure 8: Consolidating Multiple Notices of Potential Private
Retirement Benefit Information with the Social Security Statement Can
Consolidate Information Critical to Individuals for Tracking Multiple
Accounts:
Figure 9: Inactive Retirement Accounts in Switzerland Are Invested in
a Central Fund:
Figure 10: Three Possible Ways Workplace Retirement Accounts Can
Follow Job-Changing Participants:
Figure 11: Danish Pension Registry Screenshot:
Figure 12: Forced-Transfer IRA Process for Active 401(k) Plans:
Abbreviations:
ATO: Australian Tax Office:
BLS: Bureau of Labor Statistics:
DOL: Department of Labor:
EBSA: Employee Benefit Security Administration:
EGTRRA: Economic Growth and Tax Relief Reconciliation Act of 2001:
ERISA: Employee Retirement Income Security Act of 1974:
IRA: individual retirement account:
IRC: Internal Revenue Code:
IRS: Internal Revenue Service:
OEA: Office of Outreach, Education, and Assistance:
PBGC: Pension Benefit Guaranty Corporation:
PPA: Pension Protection Act of 2006:
SEC: Securities and Exchange Commission:
SSA: Social Security Administration:
Treasury: Department of the Treasury:
[End of section]
United States Government Accountability Office:
GAO:
441 G St. N.W.
Washington, DC 20548:
November 21, 2014:
The Honorable Tom Harkin:
Chairman:
Committee on Health, Education, Labor and Pensions:
United States Senate:
The Honorable Elizabeth Warren:
Member:
Committee on Health, Education, Labor and Pensions:
United States Senate:
Every year, millions of American workers change jobs[Footnote 1] and
many fail to stipulate what should be done with 401(k) plan[Footnote
2] savings[Footnote 3] they may have accrued. If a separated
participant's[Footnote 4] 401(k) plan balance is small enough, it can
be transferred out of the plan. Specifically, the Internal Revenue
Code[Footnote 5] allows former employers to force participants with
vested balances of $5,000 or less out of their 401(k) plans[Footnote
6] and, absent participant instruction, transfer their savings into an
individual retirement account (IRA) referred to as a forced-
transfer[Footnote 7] IRA in this report. Despite the potentially large
volume of forced transfers that may occur annually, their effects on
workers' retirement security are not well understood.[Footnote 8]
Additionally, many employees go on to participate in other companies'
401(k) plans and may accumulate multiple accounts over time. As these
employees continue to move in and out of jobs, companies go out of
business or merge with other companies, and plans are terminated or
merged as a part of corporate restructuring, it is difficult for plans
and participants to keep track of one another, according to industry
professionals and consumer groups.
Regulators have focused on helping plan participants save through
401(k) plans, but little attention has been paid to the use of forced
transfers or managing multiple accounts. Consequently, you asked us to
examine these issues and the steps that other countries may be taking
to address similar issues. Specifically, this report examines (1) what
happens to forced-transfer IRAs over time, (2) the challenges 401(k)
plan participants face keeping track of their retirement savings, and
what, if anything, is being done to help them, and (3) how other
countries address the challenges of inactive[Footnote 9] accounts.
To understand what happens to forced-transfer IRAs over time as well
as challenges 401(k) plan participants face keeping track of multiple
401(k) plan accounts, we reviewed relevant data from government,
research, and industry sources. Because we found no comprehensive data
on the number of IRA accounts opened as a result of forced transfers
or other data relevant to their use and management, we collected data
from a non-generalizeable group of 10 providers of forced-transfer
IRAs about their practices and outcomes, including 3 of the largest
IRA providers. There is no comprehensive list of all forced-transfer
IRA providers. For this reason, we built a list of them through
interviews with industry professionals, a review of IRA market data,
and online searches. Our objective was to create a group that would
cover a large share of assets in the forced-transfer IRA market and
represent both small and large IRA providers in terms of company size.
We reached out to the largest IRA providers by assets under
management, as well as all small forced-transfer IRA providers on our
list and obtained forced-transfer IRA account data from 10 providers
that represent this mix of characteristics. We also interviewed plan
sponsor groups, 401(k) plan industry groups, research entities,
consumer groups, and six federal agencies (Consumer Financial
Protection Bureau, Department of Labor, Department of the Treasury,
Pension Benefit Guaranty Corporation, Securities and Exchange
Commission, and Social Security Administration) about plans' use of
forced transfers and what challenges individuals and plans face
related to inactive accounts and multiple 401(k) plan accounts in the
United States. To assess the reliability of the data we analyzed, we
reviewed IRA market data and interviewed IRA providers familiar with
forced-transfer IRAs. We determined that these data were sufficiently
reliable for the purposes of this report.
We also reviewed research and industry literature, relevant federal
laws and regulations, Advisory Council on Employee Welfare and Pension
Benefit Plans[Footnote 10] testimony on missing participants, industry
whitepapers on a proposed default roll-in system, and submissions in
response to the 2013 Pension Benefit Guaranty Corporation request for
information related to a tracking system for distributions from
terminating plans.
To examine how some countries are addressing the challenges of
inactive retirement accounts, we selected six countries to study. In
making our selection we considered countries with extensive workplace
retirement systems to include populations that might face challenges
similar to those of U.S. participants, and considered the extent to
which such countries had recent or innovative approaches to address
the challenges posed by inactive retirement accounts. We determined
that six countries could potentially provide lessons for the United
States. They were Australia, Belgium, Denmark, the Netherlands,
Switzerland, and the United Kingdom. We interviewed government
officials, service providers, and other stakeholders from all the
selected countries. We did not conduct an independent legal analysis
to verify the information provided about the laws or regulations in
the countries we selected for this study. Instead, we relied on
appropriate secondary sources, interviews with relevant officials, and
other sources to support our work. We submitted key report excerpts to
agency officials in each country for their review and verification,
and we incorporated their technical corrections as necessary. Appendix
I provides additional information on our scope and methodology.
We conducted this performance audit from May 2013 to November 2014 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
Forced Transfers and Forced-Transfer IRAs:
A forced transfer occurs when a plan participant has separated from an
employer, but still has vested savings in the employer's 401(k) plan
and the plan sponsor decides not to allow the savings to remain in the
plan. Prior to the Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA),[Footnote 11] plans could, in the absence of
participant instructions, distribute balances of not more than $5,000
by paying them directly to the participant, referred to as a cash-out.
EGTRRA sought to protect forced-out participants' retirement savings
by requiring that, in the absence of participant instructions, active
plans transfer balances of $1,000 or more to forced-transfer IRAs,
thus permitting the plan to distribute them while preserving their tax-
preferred status.[Footnote 12] Expanding upon the statute, regulations
later provided that in the absence of participant instructions, plans
could opt to also transfer balances of $1,000 or less into forced-
transfer IRAs. Active plans may not distribute accounts with
contributions of more than $5,000 without the consent of the
participant.[Footnote 13]
EGTRRA also required DOL to prescribe regulations providing safe
harbors under which the designation of a provider and the investment
of funds for a forced-transfer IRA are deemed to satisfy fiduciary
duties under ERISA.[Footnote 14] These regulations, issued in 2004,
established a 'safe harbor' for plan fiduciaries transferring forced-
out participants' accounts, which includes conditions pertaining to
the plan fiduciaries' selection of the IRA provider and the
investments of the transferred funds.[Footnote 15] We identified five
main components in the regulations, which are: (1) preservation of
principal, (2) maintenance of the dollar value of the investment, (3)
using an investment product of a state or federally regulated
financial institution, (4) fees and expenses, and (5) a participant's
right to enforce the terms of the IRA. Plan sponsors forcing
participants out of plans by transferring their accounts into forced-
transfer IRAs legally satisfy their fiduciary standard of care to
participants if they comply with DOL's safe harbor
regulations.[Footnote 16] After the account is transferred into a
forced-transfer IRA it is subject to the rules generally governing
IRAs.
A forced-transfer IRA is a type of IRA that can be opened by a plan on
behalf of a participant, without the specific consent or cooperation
of that participant. In these instances, a plan signs a contract with
an IRA provider, which may or may not be the plan's record keeper, to
establish and maintain the account. While the use of forced-transfer
IRAs for accounts under $1,000 is not required, plan sponsors may
elect to use forced-transfer IRAs rather than cash-outs when forcing
out such accounts in the absence of distribution instructions from the
participant, as shown in figure 1.[Footnote 17]
Figure 1: Options for Forcing Out a Separated Participant Depend on
the Participant's Vested Balance:
[Refer to PDF for image: illustration]
Can be forced out:
Account value: 0-$1,000: Can be cashed out;
Account value: $1,000-$5,000: Must transfer to an IRA absent an
election from the participant.
Cannot be forced out:
Account value: $5,000 or more:
No action without participant's election.
Source: GAO review of select laws and regulations. GAO-15-73.
Note: A plan can only transfer a participant's eligible account to a
forced-transfer IRA in the absence of the participant's instruction to
do otherwise. An account of less than $1,000 can also be transferred
to a forced-transfer IRA, if the plan provides. These balance
thresholds pertain to active plans. In the case of terminating plans
that must distribute all benefits in order to complete the
termination, plans can forcibly transfer missing participants' account
balances of any size if the participant, after being notified, does
not provide instruction and cannot be located after a search.
[End of figure]
Use of forced-transfer IRAs is common among 401(k) plans. One annual
industry survey shows that about half of active 401(k) plans force out
separated participants with balances of $1,000 to $5,000.[Footnote 18]
Data provided by the Social Security Administration (SSA) highlight an
amount of retirement savings that could be eligible for forced-
transfer IRAs. From 2004 through 2013, separated employees left more
than 16 million accounts of $5,000 or less in workplace plans, with an
aggregate value of $8.5 billion.[Footnote 19] A portion of those
accounts constitutes billions in retirement savings that could be
transferred later to IRAs. Even if plans do not force out
participants' accounts immediately upon separation they may do so
later in the year. For instance, they may sweep out small accounts of
separated participants once a year or amend their plans years after
participants separate and then force them out.
Regulatory Oversight of Forced Transfers:
Multiple federal agencies have a role in overseeing forced transfers
and investments, inside and outside the Employee Retirement Income
Security Act of 1974 (ERISA) plan environment, as discussed in table 1.
Table 1: Brief Summary of Federal Agencies' Roles Overseeing Forced
Transfers of Separated 401(k) Plan Participants:
Department of Labor (DOL):
DOL administers and enforces the Employee Retirement Income Security
Act of 1974 (ERISA), which requires plan fiduciaries to act solely in
the interest of plan participants and beneficiaries.[A] DOL
promulgated a safe harbor rule pursuant to statute[B] for plans
transferring balances to forced-transfer IRAs.[C] The rule sets out
conditions that, if met, will ensure that a plan sponsor using forced-
transfer IRAs satisfies its fiduciary standard of care under ERISA.
Like the plan sponsor, DOL's oversight of such funds generally ends
after those funds are transferred out of the ERISA plan into a forced-
transfer IRA because DOL generally has no jurisdiction over IRAs.[D]
Internal Revenue Service (IRS):
The IRS oversees the compliance of 401(k) plans and IRAs with the
Internal Revenue Code (IRC), which sets standards plans and IRAs must
meet to qualify for preferential tax treatment. For example, the IRC
lays out requirements for plans making forced transfers[E] and
requires that any participant whose balance is to be distributed has
the option of having a direct (and thus, non-taxable) transfer of
their balance to a tax-qualified plan or IRA of their choosing. The
IRS is also responsible for imposing taxes on prohibited
transactions.[F]
Pension Benefit Guaranty Corporation (PBGC):
The Pension Protection Act of 2006 amended ERISA to require PBGC to
expand its program under which terminated defined benefit plans must
transfer the designated benefits of missing participants to PBGC, to
permit terminating 401(k) plans to transfer the assets of missing
participants to PBGC as well.[G] On June 21, 2013, the agency
published a request for information from the public about how to
implement the new requirement,[H] but has not yet implemented it. PBGC
may, but is not required to, compel terminating defined contribution
plans to provide information on what happens to participant accounts.
PBGC does not track information about the location of assets
transferred out of active plans into forced-transfer IRAs, but
maintains an online database the public can use to find lost benefits
from some terminated defined benefit plans.
Social Security Administration (SSA):
SSA maintains data reported to the IRS by plans on undistributed
vested 401(k) plan (and other plan) benefits of their separated
participants using the Form 8955-SSA.[I] When individuals apply for
Social Security benefits, SSA must transmit to the individuals, on a
letter called "Potential Private Retirement Benefit Information,"[J]
notice that the individuals may be entitled to private retirement
savings or benefits from a past employer.
Securities and Exchange Commission (SEC):
The laws that govern the securities industry include the Securities
Act of 1933, the Securities Exchange Act of 1934, the Investment
Company Act of 1940 and the Investment Advisers Act of 1940.[K] The
SEC is the primary regulator overseeing various entities (e.g.,
transfer agents broker-dealers) and investment vehicles, such as
mutual funds, which are offered in both 401(k) plans and IRAs. The
Investment Company Act of 1940 is the primary law that governs a
mutual fund's activities. Mutual funds are subject to extensive
investment restrictions and disclosure requirements with respect to
risks, fees, and expenses.
Source: GAO review of select laws and regulations. GAO-15-73.
[A] 29 U.S.C. § 1104.
[B] Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L.
No. 107-16, § 657(c)(2), 115 Stat. 38, 136.
[C] 29 C.F.R. § 2550.404a-2.
[D] DOL also determines when prohibited transactions may have occurred
with respect to such IRAs.
[E] 26 U.S.C. § 401(a)(31)(B). By distribution, we mean that
retirement savings are leaving a particular plan. They could be
transferred by the account holder to a new employer's plan, to an
existing IRA, or transferred by the plan into a forced-transfer IRA on
behalf of the account holder. The distribution could also be cashed
out by the account holder--or by the plan if the balance is below
$1,000--but in this report we do not assume that a distribution is
equivalent to a cash-out.
[F] 26 U.S.C. § 4975.
[G] Pub. L. No. 109-280, § 410(b), 120 Stat. 780, 934-35 (codified at
29 U.S.C. § 1350(d)).
[H] Missing Participants in Individual Account Plans, 78 Fed. Reg.
37,598.
[I] 26 U.S.C. § 6057(a).
[J] 42 U.S.C. §1320b-1(a)(2)(B). See figure 7 for an excerpt of the
Notice. The law also requires that SSA provide potential pension
benefit information to participants upon request.
[K] 15 U.S.C. §§ 77a-77bbb, 15 U.S.C. §§ 78a-78pp, 15 U.S.C. §§ 80a-1-
80a-64, and 15 U.S.C. §§ 80b-1-80b-2, respectively.
[End of table]
Current Law and Regulations Allow Sponsors to Force Certain
Participants Out of 401(k) Plans, Which Can Result in Reduced
Retirement Income:
Conservative Investments Required by DOL Can Result in Decreasing
Balances in Forced-Transfer IRAs:
Some forced-transfer IRAs are not the short-term investment vehicles
for which their default investments are better suited, but providers
do not have the flexibility under current DOL safe harbor regulations
to use investment vehicles that are better suited to a longer-term
investment horizon.[Footnote 20] Rather, the safe harbor requires that
the investment "seek to maintain, over the term of the investment,"
the dollar value equal to the amount rolled over.[Footnote 21] To
achieve this, DOL narrowly wrote the investment guidance portion of
the forced-transfer IRA safe harbor regulations to effectively limit
providers to holding the funds in money market funds, certificates of
deposit, or assets with similarly low investment risk typically deemed
appropriate for holding money for a short term.[Footnote 22] While
such conservative investments generally ensure that the money is
liquid (that is, available to the owner upon demand for cash-out,
transfers to another account, or reinvestment elsewhere), they can
result in a low return and potentially minimal growth over time.
Most forced-transfer IRA balances in accounts we analyzed will
decrease if not transferred out of forced-transfer IRAs and
reinvested, because the fees charged to the forced-transfer IRAs often
outpace the low returns earned by the conservative investments
prescribed by DOL's safe harbor regulations. In recent years, the
typical forced-transfer IRA investment, such as a money market
account, has earned almost no return. For example, taxable money
market funds averaged 1.45 percent for the 10 years ending July 31,
2014.[Footnote 23] We collected forced-transfer IRA account
information from 10 forced-transfer IRA providers, including
information about the fees they charged, the default investments used,
and the returns obtained (prior to these fees).[Footnote 24] Among
those 10, there were 19 different combinations of fees and returns, as
some providers offered more than one combination for their forced-
transfer IRA contracts. The typical investment return for the 19
different forced-transfer IRA combinations ranged from 0.01 percent to
2.05 percent. A low return coupled with administrative fees, ranging
from $0 to $100 or more[Footnote 25] to open the account and $0 to
$115 annually, can steadily decrease a comparatively small stagnant
balance.[Footnote 26] Using the forced-transfer IRA fee and investment
return combinations, we projected the effects on a $1,000 balance over
time. While projections for different fees and returns show balances
decreasing at different rates, generally the dynamic was the same:
small accounts with low returns and annual fees decline in value,
often rapidly. In particular, we found that 13 of the 19 balances
decreased to $0 within 30 years.[Footnote 27] (See appendix III for
all projected outcomes.) For example, the fees and investment returns
of one provider we interviewed would reduce an unclaimed $1,000
balance to $0 in 9 years.[Footnote 28] Even if an account holder
claimed their forced-transfer IRA after a few years the balance would
have significantly decreased. Among the 19 combinations we analyzed,
our analysis showed an average decrease in a $1,000 account balance of
about 25 percent over just 5 years. The rate of investment return
needed to ensure a forced-transfer IRA balance does not lose real
value varies depending on the rate of inflation and the fees charged.
For example, given the median fees for the 19 forced-transfer IRAs we
analyzed, the investment return on $1,000 would have to be more than
7.3 percent to keep pace with both the rate of inflation and the fees
charged.[Footnote 29] Our projections are consistent with anecdotal
evidence obtained from forced-transfer IRA providers, five of which
told us that their accounts are reduced to zero or do not keep pace
with inflation and fees.
Default investments used by many plans for automatic enrollment in
401(k) plans produce a better long-term return than the conservative
default investments for forced-transfer IRAs. The most popular default
investments for automatic enrollment in 401(k) plans are target date
funds. Target date funds, which are often mutual funds, hold a mix of
stocks, bonds, and other investments. Over time, the mix gradually
shifts according to the fund's investment strategy. We previously
reported that target date funds are designed to perform well over a
long period of time.[Footnote 30] As noted in an industry research
paper, while some target date funds produced severe losses in 2008,
most have since produced double digit gains.[Footnote 31] In recent
years, assets in target date fund default investments have produced a
higher return than typical forced-transfer IRA investments, which have
seen minimal returns.[Footnote 32] For example, as shown in figure 2,
under reasonable return assumptions, if a forced-out participant's
$1,000 forced-transfer IRA balance was invested in a target date fund
the balance could grow to about $2,700 over 30 years (173 percent
growth), while the balance would decline to $0 if it had been invested
in a money market account. We also projected the remaining balance
assuming a 15-year average return for money market funds, which is
1.89 percent, and found no material difference in the result. Using
that return the balance significantly decreased over time, leaving a
$67 balance after 30 years.
Figure 2: A $1,000 Forced-Transfer IRA Balance Invested in a Target
Date Fund Could Grow Over 30 Years but Declines When Invested
Conservatively:
[Refer to PDF for image: multiple line graph]
Account balance:
Years after initial investment: 0;
Invested conservatively: $1,000;
Invested in a target date fund: $1,000.
;
Years after initial investment: 1;
Invested conservatively: $965.65;
Invested in a target date fund: $1013.82.
Years after initial investment: 2;
Invested conservatively: $937.65;
Invested in a target date fund: $1035.7.
Years after initial investment: 3;
Invested conservatively: $909.25;
Invested in a target date fund: $1058.94.
Years after initial investment: 4;
Invested conservatively: $880.43;
Invested in a target date fund: $1083.66.
Years after initial investment: 5;
Invested conservatively: $851.2;
Invested in a target date fund: $1109.93.
Years after initial investment: 6;
Invested conservatively: $821.54;
Invested in a target date fund: $1137.85.
Years after initial investment: 7;
Invested conservatively: $791.46;
Invested in a target date fund: $1167.54.
Years after initial investment: 8;
Invested conservatively: $760.93;
Invested in a target date fund: $1199.09.
Years after initial investment: 9;
Invested conservatively: $729.96;
Invested in a target date fund: $1232.64.
Years after initial investment: 10;
Invested conservatively: $698.55;
Invested in a target date fund: $1268.29.
Years after initial investment: 11;
Invested conservatively: $666.68;
Invested in a target date fund: $1306.2.
Years after initial investment: 12;
Invested conservatively: $634.35;
Invested in a target date fund: $1346.49
;
Years after initial investment: 13;
Invested conservatively: $601.54;
Invested in a target date fund: $1389.31.
Years after initial investment: 14;
Invested conservatively: $568.27;
Invested in a target date fund: $1434.84.
Years after initial investment: 15;
Invested conservatively: $534.51;
Invested in a target date fund: $1483.24.
Years after initial investment: 16;
Invested conservatively: $500.26;
Invested in a target date fund: $1534.68.
Years after initial investment: 17;
Invested conservatively: $465.51;
Invested in a target date fund: $1589.36.
Years after initial investment: 18;
Invested conservatively: $430.26;
Invested in a target date fund: $1647.49.
Years after initial investment: 19;
Invested conservatively: $394.5;
Invested in a target date fund: $1709.29.
Years after initial investment: 20;
Invested conservatively: $358.22;
Invested in a target date fund: $1774.97.
Years after initial investment: 21;
Invested conservatively: $321.41;
Invested in a target date fund: $1844.79.
Years after initial investment: 22;
Invested conservatively: $284.07;
Invested in a target date fund: $1919.02.
Years after initial investment: 23;
Invested conservatively: $246.19;
Invested in a target date fund: $1997.92.
Years after initial investment: 24;
Invested conservatively: $207.76;
Invested in a target date fund: $2081.78.
Years after initial investment: 25;
Invested conservatively: $168.77;
Invested in a target date fund: $2170.94.
Years after initial investment: 26;
Invested conservatively: $129.22;
Invested in a target date fund: $2265.71.
Years after initial investment: 27;
Invested conservatively: $89.1;
Invested in a target date fund: $2366.44.
Years after initial investment: 28;
Invested conservatively: $48.39;
Invested in a target date fund: $2473.53.
Years after initial investment: 29;
Invested conservatively: $7.09;
Invested in a target date fund: $2587.36.
Years after initial investment: 30;
Invested conservatively: -$34.81;
Invested in a target date fund: $2708.37.
Source: GAO projection based on analysis of investment return data.
GAO-15-73.
Notes: The forced-transfer IRA account assumptions used are the median
account opening fee ($6.75), median annual fee ($42), and the mean
return on taxable money market funds (1.45 percent) over 10 years
ending July 31, 2014. The target date fund example uses the same
account fees but reflects a 6.3 percent return, which is the geometric
mean of 10 year average returns across all target date funds, ending
July 31, 2014. Investment returns reflect our analysis of data
reported by Morningstar.com. An alternate projection using the 15 year
mean return ending July 31, 2014 on taxable money market funds, which
is 1.89 percent, found a result similar to the 10-year return, the
funds invested conservatively decreased significantly to $67 after 30
years.
[End of figure]
According to DOL officials, the agency has the flexibility under
current law to expand the safe harbor investment options for forced-
transfer IRAs, but currently its regulations do not permit those
accounts to be invested in the same funds allowed for participants
automatically enrolled in 401(k) plans.[Footnote 33] DOL's goal of
preserving principal is important and consistent with statute, but
without more aggressive investment options, forced-transfer IRA
balances can continue to lose value over time, causing some former
participants to lose the savings they had accumulated in their 401(k)
plans. However, allowing forced-transfer IRAs to be invested for
growth, such as through a target date fund, may be more effective in
preserving principal.
Current Law Limits Forced Transfer Options and Permits Plans to Force
Out Some Participants with Balances Larger Than $5,000:
DOL and IRS Are Precluded from Permitting Alternative Destinations for
Forced Transfers:
Currently the default destination for forced transfers of more than
$1,000 from active plans is an IRA. EGTRRA sought to protect forced-
out participants by providing that, in the absence of any participant
instructions, active plans that choose to force out participants with
accounts of $1,000 or more must transfer the accounts to an individual
retirement plan, which is defined as an IRA or individual retirement
annuity.[Footnote 34] Directing these larger balances to IRAs in lieu
of cashing them out preserves their savings' tax-preferred status in a
retirement account. Current law does not permit DOL and IRS to adopt
alternative destinations.
The forced-transfer IRA, like any IRA, is an investment product sold
in the retail environment by financial service firms.[Footnote 35]
IRAs are also subject to regulation by the IRS, which oversees
contributions to and distributions from them. DOL has limited
regulatory oversight over IRAs beyond working with IRS to oversee
enforcement of prohibited transactions provisions.[Footnote 36] Thus,
when an individual's 401(k) plan account is transferred to a forced-
transfer IRA it is no longer under the regulatory purview of ERISA and
is essentially without DOL oversight. In addition, by transferring
forced out participants' funds in accordance with the safe harbor
regulations, a plan satisfies its fiduciary duty of care under ERISA,
and the transfer constitutes a final break between the plan and the
transferred account. For example, the plan is not required to monitor
the forced-transfer IRA to ensure that the provider abides by the
terms of the agreement.
Current law permits terminating plans to distribute forced transfers
in multiple ways, with the forced-transfer IRA being only one option,
as shown in table 2.[Footnote 37] In addition to transferring accounts
to a forced-transfer IRA, terminating plans may also purchase an
annuity with the forced-transfer balances or escheat (transfer) the
balances to the state. Further, the Pension Protection Act of 2006
(PPA) created a forthcoming alternative for terminating 401(k) plans,
which will be to transfer balances to the Pension Benefit Guaranty
Corporation (PBGC) when there are no instructions from the
participants.[Footnote 38] Moreover, we found that some providers will
not provide forced-transfer IRAs for terminating plans, generally
doing so only as an accommodation to ongoing plan clients and because
these plans do not have alternatives to the IRA. As a result, a
smaller number of participants forced out of terminating plans will
end up with savings in a forced-transfer IRA.
Table 2: Terminating 401(k) Plans Have More Options Than Active Plans
When Forcing Out Participants Who Do Not Elect a Distribution Option:
If the participant does not elect another distribution option:
Terminating plans: May force out both current and separated
participants with balances of any size;
Active plans: May force out separated participants with balances not
in excess of $5,000.
Cash-out (i.e. issue a check to the account holder):
Terminating plans: Not an option, unless payment can be reliably made
to participant (not in the event of a missing participant);
Active plans: May cash-out balances of $1,000 or less.
Forced-transfer IRA:
Terminating plans: May transfer balances of any size to a forced-
transfer IRA;
Active plans: Must transfer accounts of more than $1,000 to $5,000 to
a forced-transfer IRA[A]; May transfer accounts of $1,000 or less to a
forced-transfer IRA instead of cash out.
Escheat to the state[B]:
Terminating plans: May escheat balances of any size to the
participant's last known state of residence or work location, if state
requirements are met and if an individual retirement plan is not
available[B];
Active plans: Not an option[C].
Purchase an annuity:
Terminating plans: May purchase an annuity for the participant;
Active plans: An individual retirement annuity is permitted for forced
transfers.
Transfer to a bank:
Terminating plans: May transfer to a federally insured bank account,
if an IRA or individual retirement annuity is not available.[D];
Active plans: Not an option.
Transfer to Pension Benefit Guaranty Corporation (PBGC):
Terminating plans: Pending: May transfer balances of any size to PBGC;
Active plans: Not an option.
Source: GAO review of select laws and regulations. GAO-15-73.
[A] An IRA is one form of an individual retirement plan. 26 U.S.C. §
7701(a)(37).
[B] States generally have jurisdiction over unclaimed property, but
they cannot require escheatment of inactive accounts still in a 401(k)
plan because the Employee Retirement Income Security Act of 1974
(ERISA)--the law governing employer-based retirement plans--preempts
states' claims to what would otherwise be considered abandoned
property. 29 U.S.C. §1144. Therefore, this escheatment is the plan's
choice for the disposition of the account. U.S. Dept. of Labor, Field
Assistance Bulletin 2014-01 (Aug. 14, 2014), available at [hyperlink,
http://www.dol.gov/ebsa/regs/fab2014-1.html].
[C] In testimony before the ERISA Advisory Council, June 4, 2013, a
representative of The Plan Sponsor Council of America proposed that
escheatment be available to active plans seeking to manage the
administrative burden of small inactive accounts.
[D] U.S. Dept. of Labor, Field Assistance Bulletin, 2001-01. Forced-
transfer IRAs providers told us that the accounts are sometimes
escheated to states after the account holder reaches the age of
required minimum distribution.
[End of table]
We also found that forced-transfer IRAs can become long-term
investments for the many account holders who do not claim their
accounts even though the emphasis placed by the safe harbor
regulations on liquidity and minimizing risk are more often associated
with short-term investment vehicles. One of the larger providers we
interviewed said that during the first year after an account is opened
about 30 percent of account holders will do nothing with the account.
According to a forced-transfer IRA service provider, an estimated half
of the accounts they opened are for missing participants. Many
unclaimed accounts may remain so indefinitely. For example, one
provider we interviewed reported that nearly 70 percent of the
accounts it has opened within the last 5 years remain open and
unclaimed. Additionally, an individual could end up with multiple
forced-transfer IRAs over time--each incurring its own administrative
fees. Two providers we interviewed explained that they do not
consolidate forced-transfer IRAs opened for the same individual,
meaning that accounts even with the same provider could incur
redundant fees.
Although there may be alternatives to the forced-transfer IRA today
that were not considered in 2001 when the law was passed, without
authority to do so, DOL and IRS cannot identify or facilitate
alternative destinations for these accounts. Providing an alternative
destination for forced transfers would help to preserve participants'
accounts and increase the possibility for growth. Absent the allowance
of such an alternative, as we have shown, former plan participants'
savings will continue to be placed in investments unlikely to be
preserved or grow over the long term.[Footnote 39]
Disregarding Rollovers Makes It Harder for Low-Wage Workers to Keep
Retirement Savings in a 401(k) Plan:
Current law allows plans that are determining if they can force out a
participant to exclude rollover amounts and any investment returns
that have been earned while in the plan.[Footnote 40] The law
explicitly permits plans to exclude a participant's savings that were
rolled into the plan when calculating their vested balance, which
determines whether the participant may be forced out. Specifically,
separated participants with 401(k) accounts of any size can be forced
from a plan if the vested balance (in the absence of rollover amounts
and its earnings) is $5,000 or less, as demonstrated in figure 3. A
rollover of more than $5,000 would not have been subject to forced
transfer if it had remained in the participant's last plan, but may
become subject to it once transferred to the new plan.
Figure 3: 401(k) Plan Savings Rolled into a New Employer's Plan Are
Not Protected by the $5,000 Cap on Forced Transfers:
[Refer to PDF for image: illustration]
A worker participates in an employer-sponsored 401(k) plan, gradually
saving up $15,000;
The worker takes a new job, and transfers the $15,000 to his new
employer's plan;
The worker participates in his new employer's plan, saving another
$4,500, and bringing his total to $19,500;
If he leaves for a third job, he could be forced from the previous
employer's plan because only $4,500 is attributable to that plan.
Source: GAO review of select laws and regulations. GAO-15-73.
[End of figure]
As discussed further in appendix II, a significant number of plan
participants separate from jobs with vested balances at or below
$5,000 and thus can be forced out of plans. Many highly mobile workers
who participate in 401(k) plans could have significant rollover
balances that they have accumulated over time due to successive job
changes. However, they could still have their savings transferred out
of their plans into forced-transfer IRAs if their plans use forced
transfers because they are unlikely to have accumulated $5,000 vested
balances at their new plans before they separate from employment.
Figure 4 shows that disregarding rollovers can make the difference
between separated low-wage workers or other low-balance participants
remaining in plans or being forced out and then possibly transferred
into forced-transfer IRAs.
Figure 4: Disregarding Rollover Balances Can Result in Low-Wage
Workers' Vested Balances Falling Below the $5,000 Cap on Forced
Transfers:
[Refer to PDF for image: vertical bar graph]
Minimum balance to avoid a force out: $5,000.
Without a rollover:
Account balance:
Type of vesting:
3-year cliff: $1,476;
5-year graduated: $1,661;
6-year graduated: $1,624.
With a rollover:
Median roll over balance: $4,260.
Account balance:
Type of vesting:
3-year cliff: $5,736;
5-year graduated: $5,921;
6-year graduated: $5,884.
Source: GAO analysis of industry data regarding 401(k) plans' use of
different plan rules and projections; Rollover data from ICI's report
“The IRA Investor Profile: Traditional IRA Investors' Rollover
Activity, 2007 and 2008”. GAO-15-73.
Notes: The projections assume the annual mean wage in 2013 ($21,580)
for the service sector occupation with the most workers, specifically
"food preparation and serving related occupations", including an
annual raise of 2.36 percent, which is the average annual increase in
wage over 15 years (1999-2013). For these assumptions, we referred to
the U.S. Bureau of Labor Statistics' (BLS) Occupational Employment
Statistics, Employment and Wage Estimates. We assumed a 2.2 year
tenure, which is the 2014 median tenure for employed workers in the
food preparation and serving related occupations, according to BLS
data. We also assumed that employer contributions, when there were
any, were made concurrently with employee contributions. More than
half of defined contribution plans (such as 401(k) plans) are in the
service sector and about 40 percent of defined contribution plan
participants work in the service sector, according to 2011 data
published by the Employee Benefits Security Administration. These
projected amounts also reflect a 6.3 percent investment return, which
is the geometric mean of 10-year returns for all target date funds
according to our analysis of data from Morningstar.com. Target date
funds are the most popular default investment for individuals
automatically enrolled into 401(k) plans, according to the Plan
Sponsor Council of America's (PSCA) 55th Annual Survey of Profit
Sharing and 401(k) Plans, which reflects the 2011 plan experience. The
median rollover balance is for participants age 30-34 with an average
income less than $35,000 in 2007, according to the Investment Company
Institute. The Investment Company Institute, The IRA Investor Profile:
Traditional IRA Investors' Rollover Activity, 2007 and 2008 (2010).
This projection reflects our 'moderate' assumptions for a low-wage
worker's vested balances, which assumes a 3 percent employee
contribution, a 50 percent employer match, and a 3-month service
requirement. About 54 percent of plans that automatically enroll
employees in the plan set a default contribution of 3 percent of
salary and 48 percent of plans offer a 50 percent match, according to
data from the Plan Sponsor Council of America's (PSCA) 55th Annual
Survey of Profit Sharing and 401(k) Plans. According to the same
source, 16.6 percent of plans reported a service requirement of three
months. Our assumptions for vesting schedules follow:
* Under 3-year cliff vesting, the employer's contribution is 100
percent vested after 3 years of service.
* Under graduated vesting, the employer's contribution is partially
vested after each year of service, depending on how long the graduated
vesting period is. For example, in our projections, we used:
- for a 5-year graduated vesting schedule: 0, 25, 50, 75, 100 percent
at the ends of years 1 through 5; and:
- for a 6-year gradated vesting schedule: 0, 20, 40, 60, 80, and 100
percent at the end of years 1 through 6.
[End of figure]
If the $19,500 balance used as an example in figure 3, which included
rollover funds, had been left in a 401(k) plan and invested in a
target date fund earning 6.3 percent, it would have gained more than
$80,000 over 30 years, reflecting more than 400 percent growth,
potentially much more than if it was invested conservatively in a
forced-transfer IRA (see figure 5).
Figure 5: Projected Growth of $19,500 Balance Invested in a Forced-
Transfer IRA or Left in a 401(k) Plan:
[Refer to PDF for image: multiple line graph]
Years after initial investment: 0;
Conservatively invested forced-transfer IRA: $19,500;
Balance left in 401(k) plan[A]: $19,500
Years after initial investment: 1;
Conservatively invested forced-transfer IRA: $19,734;
Balance left in 401(k) plan[A]: $20,590.
Years after initial investment: 2;
Conservatively invested forced-transfer IRA: $19,978;
Balance left in 401(k) plan[A]: $21,740.
Years after initial investment: 3;
Conservatively invested forced-transfer IRA: $20,226;
Balance left in 401(k) plan[A]: $22,955.
Years after initial investment: 4;
Conservatively invested forced-transfer IRA: $20,477;
Balance left in 401(k) plan[A]: $24,238.
Years after initial investment: 5;
Conservatively invested forced-transfer IRA: $20,732;
Balance left in 401(k) plan[A]: $25,592.
Years after initial investment: 6;
Conservatively invested forced-transfer IRA: $20,991;
Balance left in 401(k) plan[A]: $27,022.
Years after initial investment: 7;
Conservatively invested forced-transfer IRA: $21,253;
Balance left in 401(k) plan[A]: $28,532.
Years after initial investment: 8;
Conservatively invested forced-transfer IRA: $21,519;
Balance left in 401(k) plan[A]: $30,126.
Years after initial investment: 9;
Conservatively invested forced-transfer IRA: $21,789;
Balance left in 401(k) plan[A]: $31,810.
Years after initial investment: 10;
Conservatively invested forced-transfer IRA: $22,063;
Balance left in 401(k) plan[A]: $33,587.
Years after initial investment: 11;
Conservatively invested forced-transfer IRA: $22,341;
Balance left in 401(k) plan[A]: $35,464.
Years after initial investment: 12;
Conservatively invested forced-transfer IRA: $22,623;
Balance left in 401(k) plan[A]: $37,445.
Years after initial investment: 13;
Conservatively invested forced-transfer IRA: $22,909;
Balance left in 401(k) plan[A]: $39,538.
Years after initial investment: 14;
Conservatively invested forced-transfer IRA: $23,199;
Balance left in 401(k) plan[A]: $41,747.
Years after initial investment: 15;
Conservatively invested forced-transfer IRA: $23,494;
Balance left in 401(k) plan[A]: $44,080.
Years after initial investment: 16;
Conservatively invested forced-transfer IRA: $23,792;
Balance left in 401(k) plan[A]: $46,543.
Years after initial investment: 17;
Conservatively invested forced-transfer IRA: $24,095;
Balance left in 401(k) plan[A]: $49,144.
Years after initial investment: 18;
Conservatively invested forced-transfer IRA: $24,403;
Balance left in 401(k) plan[A]: $51,890.
Years after initial investment: 19;
Conservatively invested forced-transfer IRA: $24,714;
Balance left in 401(k) plan[A]: $54,789.
Years after initial investment: 20;
Conservatively invested forced-transfer IRA: $25,031;
Balance left in 401(k) plan[A]: $57,851.
Years after initial investment: 21;
Conservatively invested forced-transfer IRA: $25,352;
Balance left in 401(k) plan[A]: $61,083.
Years after initial investment: 22;
Conservatively invested forced-transfer IRA: $25,677;
Balance left in 401(k) plan[A]: $64,497.
Years after initial investment: 23;
Conservatively invested forced-transfer IRA: $26,008;
Balance left in 401(k) plan[A]: $68,100.
Years after initial investment: 24;
Conservatively invested forced-transfer IRA: $26,343;
Balance left in 401(k) plan[A]: $71,906.
Years after initial investment: 25;
Conservatively invested forced-transfer IRA: $26,683;
Balance left in 401(k) plan[A]: $75,924.
Years after initial investment: 26;
Conservatively invested forced-transfer IRA: $27,028;
Balance left in 401(k) plan[A]: $80,166.
Years after initial investment: 27;
Conservatively invested forced-transfer IRA: $27,377;
Balance left in 401(k) plan[A]: $84,646.
Years after initial investment: 28;
Conservatively invested forced-transfer IRA: $27,732;
Balance left in 401(k) plan[A]: $89,375.
Years after initial investment: 29;
Conservatively invested forced-transfer IRA: $28,093;
Balance left in 401(k) plan[A]: $94,370.
Years after initial investment: 30;
Conservatively invested forced-transfer IRA: $28,458;
Balance left in 401(k) plan[A]: $99,643.
Source: GAO projection based on analysis of forced-transfer IRA and
401(k) industry data. GAO-15-73.
Notes: We use a $19,500 balance for this example because it reflects
the 401(k) balance workers might have if they rolled over their vested
balances from prior employers several times ($5,000 x 3 jobs), but had
less than a $5,000 vested balance (say $4,500) at their current plan.
We used a target date fund investment for the plan projection because
target date funds are the most popular default investment for 401(k)
plans using automatic enrollment, according to Plan Sponsor Council of
America's (55th) Annual Survey of Profit Sharing and 401(k) Plans. The
6.30 percent target date fund return is the geometric mean for the 10-
year average returns through July 31, 2014, on all target date funds,
which reflects our analysis of data from Morningstar.com. We assumed
an 'all-in' 401(k) plan fee of .67 percent, which was the median
participant and asset weighted all-in fee among defined contribution
plans, according to an Investment Company Institute and Deloitte
survey and report "Inside the Structure of Defined Contribution/401(k)
Plan Fees, 2013: A study assessing the mechanics of the 'all-in' fee,"
published August 2014, that surveyed defined contribution plans
covering a range of plan assets and participant counts for plans with
assets of $1 million or more. For the forced-transfer IRA, we
calculated the median account opening fee ($6.75) and the median
annual fee ($42). We used the mean 10-year return for taxable money
market funds, as calculated by us with data from Morningstar.com. An
alternate projection using the 15-year mean return ending July 31,
2014 on taxable money market funds, which is 1.89 percent, resulted in
a balance of $32,510, still about a third of what could be earned in a
target date fund.
[A] "Balance left in 401(k) plan" projection assumes investment in a
target date fund earning 6.30 percent with a 0.67 percent all-in fee.
See general notes below for detail on these assumptions.
[End of figure]
Participants trying to consolidate their savings as they move from job
to job could ultimately lose their ability to remain in a 401(k) plan
with its choice of investments and could realize a lower retirement
savings balance because of the current provision allowing rollover
balances to be forcibly transferred out of the plan environment.
Absent a change in law, active plans can continue to force out
participants who have account balances over $5,000 by excluding
rollover funds when calculating the vested balance, creating a
disadvantage for those workers who change jobs and consolidate to keep
their retirement savings in the plan environment. As we previously
reported, investing in a workplace plan offers certain features that
may suit individuals.[Footnote 41]
Low-Wage Workers' and Young Workers' Vested Balances May Often Fall
Below the Required $5,000 Vested Balance Needed to Prevent Forced
Transfers:
Low-wage workers and young workers are vulnerable to forced transfers
since they may change jobs often, which can leave them with
particularly low balances. As shown in figure 3, we projected the
vested balance of an average low-wage worker who: 1) earns $21,580
(the mean annual salary in 2013 for the largest occupational group
within the service sector),[Footnote 42] 2) works an average service
sector tenure of 2.2 years, and 3) receives a 2.36 percent annual
salary increase (the average annual change in earnings over 15 years
from 1999 to 2013). We found that the vested balance fell below $5,000
even when using our "optimistic" assumptions.[Footnote 43] (See
appendix IV for more detail on the projections.) However, as discussed
above, if the participant had transferred a small balance in a prior
plan to their current plan, it could be enough to push their vested
balance over the $5,000 cap, preventing a forced transfer, if plans
were not permitted under current law to disregard rollover balances.
A service requirement[Footnote 44]--the length of time a plan may
require that someone work before participating in the 401(k) plan--
like a vesting schedule, makes it harder for a worker to build up a
vested balance that will exceed the $5,000 cap on forced transfers. In
2011, about 40 percent of plans used a service requirement.[Footnote
45] Service requirements can result in smaller balances because a
participant has less time to contribute to their account. If a plan
imposes a service requirement and a vesting requirement, young workers
and low-wage workers may not be able to accumulate vested balances
over $5,000. As shown in table 3, the median tenure for workers age 20-
24 is just 1.3 years.[Footnote 46]
Table 3: Median Years of Tenure with Current Employer, by Age (January
2014):
Age: 18-19;
Years of tenure: 0.8;
Age: 20-24;
Years of tenure: 1.3;
Age: 25-34;
Years of tenure: 3.0;
Age: 35-44;
Years of tenure: 5.2;
Age: 45-54;
Years of tenure: 7.9;
Age: 55-64;
Years of tenure: 10.4;
Age: 65+;
Years of tenure: 10.3.
Source: U.S. Bureau of Labor Statistics, Economic News Release,
"Median years of tenure with current employer for employed wage and
salary workers by age and sex, selected years, 2002-2014." This table
shows the data for men and women combined. Release last modified Sept.
18, 2014. GAO-15-73.
[End of table]
Keeping Track of 401(k) Plan Accounts Can Be Difficult Because of
Challenges with Consolidation, Communication, and Information, but SSA
Is in a Position to Help:
Having Multiple Accounts Makes It Difficult for Participants to Keep
Track of Retirement Savings:
401(k) plan participants often lose track of their accounts over time.
In the United States, the responsibility is on the individual to
manage their retirement savings, including keeping track of 401(k)
plan accounts. The considerable mobility of U.S. workers increases the
likelihood that many will participate in multiple 401(k) plans. Over
the last 10 years, 25 million participants in workplace plans
separated from an employer and left at least one account behind and
millions left two or more behind.[Footnote 47] When individuals hold
multiple jobs, they may participate in many 401(k) plans or other
types of employer-sponsored plans and upon changing jobs face
recurring decisions about what to do with their plan savings. Figure 6
illustrates how a participant can accumulate multiple retirement
accounts over a career.
Figure 6: A Worker's Accumulation of Multiple Accounts for Retirement
Savings:
[Refer to PDF for image: illustration]
Worker leaves for a new job without giving instructions for the
distribution of $3,000 he saved in the employer's plan:
Plan moves money to a forced-transfer IRA account: $3,000.
Worker rolls $4,000 saved in second employer's plan into an Individual
Retirement Account (IRA) after taking a new job:
Worker rolls money into an IRA: $4,000;
Forced-transfer IRA.
Worker leaves the $9,000 in third employer's plan behind when he
departs to start a new job:
401(k): $9,000;
IRA;
Forced-transfer IRA.
When he starts saving in the fourth employer's 401(k) plan, the worker
has accumulated several types of accounts:
Current employer's 401(k) plan: $1,000;
Former employer's 401(k) plan;
IRA;
Forced-transfer IRA.
Source: GAO review of select laws and regulations. GAO-15-73.
[End of figure]
Participants Face Challenges Consolidating 401(k) Plan Accounts:
There are many reasons participants have multiple accounts for
retirement savings. Currently, there is no standard way for
participants to consolidate their accounts within the 401(k) plan
environment. For example, employers do not always permit rollovers
into their 401(k) plans. As we previously reported, there are barriers
to plan-to-plan rollovers that DOL and IRS need to address to
facilitate such rollovers when participants may wish to choose that
option.[Footnote 48] Absent plan-to-plan rollovers, participants
frequently roll over their accounts into IRAs or leave their 401(k)
savings with their former employers, both of which increase the number
of accounts for the participants if they then go on to enroll in their
new employers' plans. Plan-to-plan rollovers help reduce the number of
lost accounts because the accounts stay with the participants. This
option is, however, irrelevant if the new employer does not offer a
plan.
Industry representatives we interviewed said automatic enrollment also
contributes to participants having multiple accounts. Although
automatic enrollment facilitates retirement saving, individuals may be
less apt to pay attention to an account that they did not make the
decision to enroll in. Industry professionals told us that individuals
with a collection of many small accounts may forget about them because
the small balances provide them less incentive to pay attention to
them. In addition, automatic enrollment is likely to exacerbate the
accumulation of multiple, small accounts. As more participants are
brought into the system there could be an increase in forgotten
accounts, because many of those participants are unengaged from the
start, in spite of DOL notification requirements.[Footnote 49]
However, as GAO has previously reported automatic enrollment can
significantly increase participation in 401(k) plans.[Footnote 50]
Participants Face Challenges Communicating with Former Employers'
Plans:
When participants leave their savings in a plan after leaving a job,
the onus is on them to update former employers with address and name
changes, and to respond to their former plan sponsor's communications.
Plans and record keepers have no automatic way to keep this
information up to date for participants, nor do they have ways to
ensure that separated participants will respond to their
communications. For example, one industry professional noted that if
former participants' e-mail contacts are work e-mails, they will lose
contact with their plans when they change jobs and do not provide
alternate e-mail addresses. When a plan loses track of a participant
it can create a number of challenges because the plan has to spend
time and incur the cost of searching for the participant. In addition,
there are no standard practices among plans and providers for the
frequency or method of conducting searches for missing or
nonresponsive participants.
While there is agency guidance on searching for missing participants
in terminating plans prior to forcing them out,[Footnote 51] in
hearings before the ERISA Advisory Council and in our interviews,
providers and other industry professionals reported that the guidance
on searches is unclear and insufficient. For instance, it is unclear
how to satisfy disclosure requirements when the participant's address
on file is known to be incorrect. One provider told us plans are
obligated to make a "good faith effort" to locate participants, but
they do not always know what a good faith effort entails. This leaves
plans unsure of what steps they must take to satisfy applicable search
requirements.
Participants Face Challenges Obtaining Information Useful for Keeping
Track of 401(k) Plan Accounts:
Employer actions, such as terminations, mergers, and bankruptcies can
also make it difficult for participants to keep track of their
accounts. Participants and beneficiaries can lose track of former
employers' plans when the employers change location or name, merge
with another company, spin-off a division of the company, or go out of
business. DOL officials said that one of the most challenging problems
facing participants and their advocates is tracking down lost plans.
For example, company records for legacy plans, old plans that no
longer have operating units, may be scattered, making employee and
participant data difficult to locate, and the former plan's
administrative staff may no longer be available to respond to
questions regarding participant records.
The current regulatory environment also presents challenges to
participants. Participants separating from their employer are to
receive information about their accounts via multiple disclosures.
Depending on the actions participants take regarding their accounts
upon separation, their former employers will provide them and
regulatory agencies with relevant required disclosures and reports.
(See appendix VI for a list of selected disclosures required when
participants separate from employment or when plans undergo certain
types of corporate restructuring.) As participants change jobs over
time and accumulate multiple accounts, those who remain engaged with
their accounts will acquire a large volume of documentation. For
example, the hypothetical worker from figure 6 who had separated from
three jobs would receive at least nine different notices from the
three plan sponsors. In the instances where the worker's 401(k) plan
savings were transferred to another account, the worker would have
been provided information about the new account. Over time, the worker
would continue to receive annual--or sometimes quarterly--statements
from each account as well as various other notices and disclosures
depending on any changes in the structure or terms of the plans or
accounts. Over 10 years, if that worker had no further job changes or
changes to the existing accounts, routine account statements alone
would result in at least 40 separate documents. If even one of the
accounts issued quarterly statements, the number of documents would
increase to 70, which does not include any disclosures the worker
might receive about the underlying investments of the accounts or
information regarding changes to a plan or IRA.
Participants may also have difficulty understanding the complex
notices or account statements they receive. As we have previously
reported, the quantity of information participants receive may
diminish the positive effects such important information could have
for them.[Footnote 52] Our previous work found that participant
disclosures do not always communicate effectively, participants often
find the content overwhelming and confusing, and many participants
rarely read the disclosures they receive.[Footnote 53]
In addition, although 401(k) plans are required to report annually on
plan design, finances, and other topics to DOL, IRS, and PBGC via the
Form 5500 Series[Footnote 54] and a number of other forms required by
the IRS,[Footnote 55] the information reported may not always result
in a clear record or trail of employer or plan changes. For instance,
DOL officials told us that many small plans fail to file an updated or
final Form 5500, which would include a valuable piece of information,
an employer identification number, which can be used to track a new
plan resulting from a merger.[Footnote 56] In the event of a plan
termination, the plan administrator may file Form 5310, a request for
a determination letter on a plan's qualified status, with the IRS, but
must provide participants an "Notice to Interested Parties" notifying
them of their right to comment on the plan termination. In certain
instances of a company spinoff, only the plan that was in existence
before the spinoff is required to file a Form 5310-A, making it
difficult to trace the new plan back to the original plan. We recently
reported that this notice confuses participants and it is difficult
for the average pension plan participant to exercise their right to
comment.[Footnote 57] In addition, participants may receive a Notice
of Plan Termination that includes information on their account
balance, distribution options, and information about making an
election and providing instructions to the plan.
Federal agency officials told us that inactive participants can fail
to find their accounts with former employers and do not always know
where to go to seek assistance or find information about their
accounts. (See table 4 for descriptions of the role of federal
agencies and other entities in helping participants find their plan
accounts). Even with the information participants received while still
active in plans or at separation, they then have to figure out which
agencies and private sector entities to contact to find their
accounts. Former employers and record keepers have information
participants may need, but participants will need to have stayed in
contact with their former employers to get that information. Federal
agencies may also have some of the information that participants may
need. However, the information that agencies provide is not designed
to help participants keep track of multiple accounts or to find lost
accounts. Consequently, participants searching for their accounts from
former employers may have incomplete information. Moreover, if
participants kept the notices and statements sent to them, the
information they need may be out of date and located in multiple
documents. As a result of such information challenges, even those who
obtain assistance from benefits advisors with government or non-profit
programs may be unable to locate all of their retirement savings.
Table 4: Federal Agencies or Entities That Can Help Former
Participants Locate 401(k) Accounts:
DOL's Office of Outreach, Education, and Assistance (OEA):
OEA is charged with assisting the public locate information about
their retirement benefits from employers. OEA has direct contact with
participants through benefits advisors that field calls to answer
questions related to retirement savings. To assist the public,
benefits advisors determine whether a participant's former employer is
still in existence, and whether it has a new address. OEA conducts a
search to determine when the employer may have filed an IRS Form 5500,
looks for fiduciaries or service providers, uses an internal database
to track changes recorded from previous calls, and references an
informal list of mergers and acquisitions that has been developed to
help reconnect individuals with their benefits. In some instances, OEA
will contact a plan to see if benefits have been paid out and they
encourage participants to check their own records for IRS 1099 forms
that would signify a benefit distribution. OEA benefits advisors
respond to requests for assistance, so participants have to know to
reach out to DOL for assistance. DOL officials told us that about 60
percent of the benefit inquiries they receive originate from
individuals who had received a notice of Potential Private Retirement
Benefit Information--signifying retirement savings left behind in a
plan--from SSA. DOL officials told us they helped 2,800 people to
reclaim about $130 million in retirement savings. But industry
professionals estimate there could be billions more in forced-transfer
IRAs and uncashed plan distribution checks.
Pension Benefit Guaranty Corporation (PBGC):
PBGC offers a publication titled Finding a Lost Pension to help
participants, and suggests documents participants may need while
searching as well as sources of information and assistance, including
other federal agencies and federally funded pension assistance
centers. Some of the information that the publication says
participants may need comes from the plan that the participant is
trying to find. The publication acknowledges that it is hard to tell
which source will provide participants with the information they need,
that there are no guarantees of success, and that experienced pension
counselors sometimes cannot find a lost pension. The publication
suggests a search include: (1) trying to find the plan sponsor on the
internet, (2) searching bankruptcy court filings if the employer went
bankrupt, (3) asking former co-workers what happened to the company,
(4) contacting any unions representing workers there, and (5)
contacting the Chamber of Commerce in the town where the company was
located. The publication suggests participants may be able to research
corporate merger or buyout information at a specialized business
library, contact one of the corporate officers listed in annual
reports corporations submitted to state governments, or contact the
plan's accountant, actuary, trustee, or attorney listed on the plan's
annual report.
Health and Human Services' Administration on Aging:
The Administration on Aging assists individuals with issues related to
their retirement security and funds non-profit pension counseling
programs operated by organizations such as the Pension Rights Center
and the Pension Action Center. At these centers, counselors assist
callers find their pension benefits, often conducting searches for
employers that are difficult to find due to bankruptcy or business
restructuring. In some cases, benefit advisors cannot locate plans due
to plans' changes in name, location, or other identifying information.
One federally subsidized consumer advocacy group we interviewed helps
about 200 people each year to find lost accounts. A representative of
the organization said they serve only a small number of those who need
help because many people are unaware of their services.
Source: GAO review of agency information and interviews with agency
personnel. GAO-15-73.
[End of table]
SSA Can Help Participants Locate Accounts by Providing Information
Earlier:
The Social Security Administration (SSA) provides information that can
help participants locate retirement savings left with a former
employer. The Potential Private Retirement Benefit Information
(Notice) includes information that could be beneficial to individuals
looking for missing accounts, including: the name of the plan where a
participant may have savings, the plan administrator's name and
address, the participant's savings balance,[Footnote 58] and the year
that the plan reported savings left behind (see figure 7).
Figure 7: Contents of the Notice of Potential Private Retirement
Benefit Information That Could Be Helpful to Individuals Looking for
Missing Retirement Accounts:
[Refer to PDF for image: page illustration]
If You Want to Apply for These Benefits:
If you want to apply for these retirement benefits or have any
questions, you should contact the Plan Administrator shown below. The
Plan Administrator provided the information as of the date in the
"Year Reported" field below. If you or the worker has already filed a
claim and received payment from the plan below, you may not be
eligible for any additional benefits. Include a copy of this notice
when you contact the Plan Administrator.
Plan Name:
Plan Number:
Identification Number:
Year Reported:
Estimated Amount:
Plan Administrator and Address:
Type of Benefit:
Payment Frequency:
Units or Shares Value of Account:
Important: See the other side of this page for an explanation of this
information.
Source: GAO selected portion of Potential Private Retirement Benefit
Information, SSA-L99-C1, Social Security Administration. GAO-15-73.
[End of figure]
SSA sends the Notice when an individual files for Social Security
benefits, which can occur as early as age 62, unless the notice is
requested earlier.[Footnote 59] Individuals appear to be generally
unaware that this personal financial information exists or that they
may request it from SSA, since few individuals request the form prior
to retirement. SSA officials said that they only received about 760
requests for the form in 2013, though according to data provided by
SSA the agency has records of potential benefits for over 33 million
people. Agency officials told us that they were not aware of any
potential advertising or effort on the agency's website [hyperlink,
http://www.ssa.gov] for promoting the availability of the Notices or
informing people about their ability to request the notices.[Footnote
60] Officials also said that approximately 70,000 Notices are
generated for new Social Security beneficiaries every month.
Individuals may receive multiple Notices at retirement if they have
left savings in more than one employer plan over their career.
Although the same information is reported on each form and SSA houses
the data for years, the data are not compiled for ease of use by the
recipient or for efficiency and cost-savings by the agency. Agency
officials explained that in the past people worked for one company for
most of their lives and were more likely to have had a traditional
defined benefit pension plan, and consequently the format of the
Notice only allows for data from one employer. Because the Notice is
not currently formatted to display consolidated data on potential
benefits from multiple employers, information on benefits from each
employer must be sent separately to the participant. Given that many
individuals will change jobs often throughout their working life, they
can therefore expect to receive several different Notices, adding to
the number of disclosures, communications, and notices they are
expected to review, understand, and consider in managing their
retirement savings. Combining multiple Notices could simplify the
process of managing multiple forms for people with more than one
account and reduce the costs to SSA.
More widely known, SSA also sends individuals a Social Security
Statement (Statement) that estimates Social Security retirement
benefits--at different claiming ages, and displays a worker's earnings
history.[Footnote 61] SSA suspended the mailing of paper copies of the
Statement in 2011, but in 2014 resumed mailing the Statements to
individuals every 5 years, starting at age 25.[Footnote 62] This
information is also available online to anyone who establishes an
account. Similar to the Notice, the Statement contains important
information about an individual's potential retirement income.
Together these documents give individuals a more complete
understanding of their income in retirement. SSA also has earnings
recorded by employer, which is available upon request, but it is not
mailed to individuals or available online. The earnings record for
each year could provide clues as to when certain periods of employment
occurred, which is key information that industry professionals suggest
individuals looking for their lost 401(k) plan accounts should have
when conducting a search.
Given the multiple Notices individuals can receive from SSA, in
addition to the Statement, finding a way to reduce duplication can
help individuals keep track of their accounts and locate missing
accounts. SSA has a process in place to review and revise the
Statement and the agency already stores all of the data published in
the Notice. As suggested in figure 8, providing the Notice at the same
time as and with the Statement is one way to give individuals a
consolidated, timely resource and reduce the volume of paperwork they
need to keep track of over time.
As noted earlier, when plans lose track of participants due to
outdated mailing addresses, participants fail to receive critical plan
communications about their accounts and about any changes to the plan
name or administrator that will be vital when they want to communicate
with the plan and claim their benefits. An industry professional we
interviewed suggested that participants receive some type of reminder
to notify plans of address changes. If participants are reminded of
their inactive 401(k) plan accounts via the Notice and prompted to
inform plans of updated address information, the accounts may be less
likely to become lost. Making the information available online or
mailing it every 5 years can remind participants of the multiple
accounts they have. Providing the combined information on inactive
accounts from multiple employers can also give individuals needed
information to keep track of their multiple accounts and provide the
opportunity to correct inaccurate account information. In addition,
having a reminder of the accounts they left behind may increase the
likelihood that participants pay attention to other plan
communications.
Figure 8: Consolidating Multiple Notices of Potential Private
Retirement Benefit Information with the Social Security Statement Can
Consolidate Information Critical to Individuals for Tracking Multiple
Accounts:
[Refer to PDF for image: page illustration]
The Potential Private Retirement Benefit Notice would be available to
individuals with the Statement:
Available online any time:
Your Social Security Statement.
Included in mailed notice:
Potential Private Retirement Benefit Information.
Source: Social Security Administration, Social Security Statement,
Form SSA-7005-SM, and Potential Private Retirement Benefit
Information, SSA-L99-C1. GAO-15-73.
[End of figure]
Other Countries Have Taken Actions to Protect Forced Transfers and
Track Retirement Accounts:
To manage inactive workplace retirement accounts, officials in the
countries in our study told us that the United Kingdom (U.K.),
Switzerland, and Australia use forced transfers and Australia,
Denmark, Belgium and the Netherlands use tracking tools. Like the
forced-transfer IRAs of the United States, the forced transfers we
were told about in these countries transfer account balances without
participant consent. In the countries we studied with forced
transfers, those accounts follow participants changing jobs, are
efficiently managed in a single fund, or are free from fees at a
government agency. Each of these approaches helps to preserve the real
value of the account for the participant, and generally ensures
workplace plans will not be left with the expenses of administering
small, inactive retirement accounts. Although the models employed vary
by country, the three countries with tracking tools we studied allow
participants online access to consolidated information on their
workplace retirement accounts, referred to as "pension registries" in
this report. Approaches include both databases and "service bus"
interfaces connecting providers to participants in real time.[Footnote
63] Roles for government in these countries range from holding the
data and analyzing it for tax and social policy purposes to
collaborating with an industry-created pension registry, allowing for
information on national pension benefits to be provided in the
registry.
Forced Transfers in Other Countries Benefit Participants:
According to officials we interviewed in the three countries that use
forced transfers, they have legislation that (1) consolidates
transferred accounts, either in a participant's new plan or with other
forcibly-transferred accounts, and (2) enables these accounts to grow,
either at a rate comparable to participants' current retirement
accounts or at least in pace with inflation (see table 5).
Table 5: Characteristics of Forced Transfers in Three Countries and in
the United States:
When was legislation enacted?
United Kingdom: 2014;
Switzerland: 1993;
Australia: 2012[A];
United States: 2001.
Under what circumstances are accounts forcibly transferred?
United Kingdom: When an employee's new plan identifies an eligible
balance;
Switzerland: When they have been inactive between 6 and 24 months[B];
Australia: 12 months of inactivity;
United States: Plans meeting legal requirements may transfer eligible
balances at their discretion and at plan termination.
What is the maximum account size that can be forcibly transferred?
United Kingdom: £10,000 (about $17,000)[C];
Switzerland: Any amount;
Australia: AUD 2,000 (currently about $1,860)[D];
United States: $5,000[E].
Where are forced transfers sent?
United Kingdom: Consolidated into the employee's current plan[F];
Switzerland: Consolidated into a single fund[G];
Australia: Consolidated at the Australian Tax Office;
United States: Used to open a forced-transfer IRA.
Over time, what happens to forced-transfer balances?
United Kingdom: Balances grow according to returns on investments in
the employee's current plan;
Switzerland: Balances grow according to returns on central fund
investments, which are similar to returns in workplace plans;
Australia: Balances keep pace with inflation;
United States: Balances often decrease.
Source: GAO analysis of documents discussing retirement policies in
these countries and interviews with government officials. GAO-15-73.
[A] A 2009 law required accounts under AUD 200 to be transferred after
5 years of inactivity. In 2012, that legislation was amended to
reflect the content shown here.
[B] Plans must allow participants 6 months to initiate a transfer to a
new plan or an individual account or policy with a bank or insurer.
While plans can forcibly transfer participants after 6 months, they
must forcibly transfer participants after 24.
[C] In the United Kingdom, regulations implementing the forced-
transfer law have not yet been finalized. However, the U.K. Department
for Work and Pensions has tested different account sizes and
determined the size of account it plans to include.
[D] 2014 legislation contemplates further raising the accounts size
eligible for forced transfer to AUD 4,000 at the end of 2015 and AUD
6,000 at the end of 2016.
[E] While $5,000 is the cap on forced transfers of new vested plan
balances, because the law permits plans to disregard rollovers and
their earnings from previous plans when calculating the vested
balances, in the absence of any participant instructions, much larger
balances can be transferred. There is no limit on the size of a
participant balance that may be transferred to a forced-transfer IRA
by a terminating plan.
[F] U.K. employers must choose a plan for their employees working in
the United Kingdom under a 2008 U.K. law. To ensure employers have an
easy, low-cost option available, that law created the National
Employment Savings Trust, a non-profit, workplace plan available to
any employer in the United Kingdom. Mandatory automatic enrollment
began in 2012 and will include all employers beginning in 2018.
[G] The Swiss Substitute Occupational Benefits Institution (Substitute
Plan) also serves as a means for employers who do not offer their own
plan but are required to provide their employees retirement benefits
to do so, and for the self-employed to participate in a retirement
plan if they wish.
[End of table]
Switzerland--According to Swiss officials, forced transfers in
Switzerland are consolidated in a single fund, the Substitute Plan,
administered by a non-profit foundation and invested until claimed by
participants (see figure 9). The Substitute Plan serves as a back-up
in those instances when participants fail to roll their money over to
their new plan, as they are required to do by law, according to Swiss
Federal Social Insurance Office officials.
Plans report information on inactive accounts to the Guarantee Fund,
the Swiss organization insuring insolvent workplace plans. After 2
years of inactivity, those accounts must be transferred to the
Substitute Plan. Officials said the Guarantee Fund is responsible for
returning the retirement savings of participants to them in
retirement.[Footnote 64] According to officials at the Swiss Federal
Social Insurance Office, the Substitute Plan held about $5.5 to $6.6
billion in 2014. They said its investments have outperformed those in
workplace plans in recent years, and compared to most workplace plans,
its administrative costs are low, in part because the board manages
the investments itself. According to a Substitute Plan board member,
the board receives investment guidance from financial experts who
counsel its investment committee.
Figure 9: Inactive Retirement Accounts in Switzerland Are Invested in
a Central Fund:
[Refer to PDF for image: illustration]
Plan:
Required reporting to Guarantee fund (insolvency insurance);
Forced-transfer funds to Substitute plan (Forced-transfer
consolidation).
Participant:
Two-way communication with Guarantee fund (insolvency insurance);
Distribution of funds from Substitute plan (Forced-transfer
consolidation).
Source: GAO analysis of documents describing Swiss transfer policy and
statements from Swiss officials. GAO-15-73.
Note: The Swiss use a foundation entrusted by law with special tasks,
the Substitute Occupational Benefits Institution (Substitute Plan) to
hold accounts in workplace plans that were inactive and thus
transferred. Plans report information on inactive accounts to the
Guarantee Fund, the Swiss organization insuring insolvent workplace
plans, and send accounts within two years of inactivity to the
Substitute Plan. The Guarantee Fund notifies participants of any
accounts they have in the Substitute Plan when they retire, and upon
request.
[End of figure]
The United Kingdom--Officials said that the United Kingdom "pot-
follows-member" law is designed to make workplace retirement accounts
move with participants throughout their career, or at least until the
balances are large enough that they could be used to buy an annuity.
[Footnote 65] Transfers of participants' savings from a former
employer are initiated by the new employer when it is notified, likely
through information technology, of an eligible account.[Footnote 66]
Although every employer in the United Kingdom must automatically
enroll workers between age 22 and retirement age who earn more than
about $17,000 a year, U.K. officials are still considering how they
will implement the law when no new plan exists to transfer money to.
They said one benefit of putting the responsibility on the new plan is
that the trigger for the transfer does not occur until a new plan
exists. Once implemented, the pot-follows-member law will automate the
plan-to-plan rollover process for participants, keep transferred
assets under participant direction, and generally ensure plans do not
manage small, inactive accounts. Figure 10 depicts three ways
workplace retirement accounts can follow job-changing participants.
[Footnote 67]
Figure 10: Three Possible Ways Workplace Retirement Accounts Can
Follow Job-Changing Participants:
[Refer to PDF for image: illustration]
Employee leaves employer and plan: Paper:
Employer gives departing employee a paper record of his account;
Employee brings paper record to the new employer;
New plan initiates transfer of participant's funds.
Employee leaves employer and plan: Electronic reporting:
Plan reports eligible inactive accounts to an online registry;
New plan searches registry for accounts held by new employees;
New plan transfers in eligible accounts of employees.
Employee leaves employer and plan: Clearinghouse:
Participant's account transferred to a clearinghouse;
Clearinghouse identifies an active plan with service provider data;
Clearinghouse transfers participant's account to an active plan.
Source: GAO interviews with relevant officials and account transfer
policy documents. GAO-15-73.
Note: Swiss plan participants are required by law to pass a paper
record of their workplace retirement account information to their new
employer, and ensure it happens in most circumstances by requiring
them to do so by law. One solution contemplated by 2014 legislation in
the United Kingdom is a database of inactive accounts eligible for
transfer to a new employer which a new employer can use to initiate a
transfer. The clearinghouse method is one beginning to be used in the
United States, where service provider data allows a clearinghouse to
find a participant's account in their active 401(k) plan and transfer
an account that was forcibly transferred from a prior plan into their
new one.
[End of figure]
Australia--Rather than invest forcibly transferred accounts for long-
term growth, officials told us the Australian government preserves
value while taking proactive steps to reconnect participants with
their accounts. Accounts inactive for 1 year are transferred to the
Australian Tax Office (ATO), which holds them in a no-fee-environment
and pays returns equal to inflation when they are claimed.[Footnote
68] When participants access the ATO website to submit their taxes or
change their address, they are provided a link to view any account
they have that is held by the ATO, and they can consolidate it with
another account online. Unlike the United Kingdom and Switzerland, the
Australian approach requires participants to take action to invest
their transferred accounts for long-term growth, although it provides
a tool to help them do so.
Other Countries Provide Pension Registries to Help Participants Track
Accounts while the United States Does Not Have a Similar Approach:
European Commission officials we talked to said that the most basic
form of centralized information on plans should help participants find
providers, allow them to view which plans serve which employers, and
provide relevant plan contact information. All of the approaches we
reviewed in the selected countries went further. The Netherlands,
Australia, and Denmark provide consolidated, online information--
called pension registries--to participants on all of their workplace
retirement accounts, and Belgium is scheduled to do the same by 2016.
The pension registry designs in the four countries we studied with
such registries share some common elements that make them useful for
participants.
* Active and inactive accounts: All include data on both active and
inactive accounts, including account balances and plan or insurer
contact information.
* Website accessibility: All include the identity authentication
necessary to securely allow online access to individual participants.
* Workplace account information: All include information on workplace
retirement accounts.
While various benefits to participants were cited as the impetus for
creating registries in each of these countries, pension registries can
be used by plans as well. A representative of one workplace plan in
Belgium said they use pension registry data to find missing
participants, make payments to the participant as planned, and
eliminate liabilities for those payments.[Footnote 69] The
representative also added that when the pension registry goes live to
participants the plan may spend less time answering questions from
participants who do not have a clear understanding of their rights to
benefits. Instead, they will refer participants to the pension
registry for answers.[Footnote 70] Plans in Australia also use the
pension registry to identify inactive accounts their participants have
in other plans and to talk to participants about consolidating their
accounts. Table 6 shows various attributes of the pension registries
in the countries we included in our study. Further details on these
pension registries can be found in appendix VII.
Table 6: Attributes of Pension Registries Used in Four Countries in
2014:
Does it include broad information to facilitate retirement planning?
Denmark: Yes;
The Netherlands: Planned;
Belgium: No;
Australia: No.
Does it include information on national, workplace, and personal
retirement income sources?
Denmark: All;
The Netherlands: Workplace and national;
Belgium: Workplace and national[A];
Australia: Workplace only.
How is it financed?
Denmark: By pension providers voluntarily;
The Netherlands: Per-participant fee paid by pension providers;
Belgium: Government general revenue;
Australia: Government general revenue and pension industry tax.
What was the impetus for the creation of the registry?
Denmark: To help individuals track multiple accounts, locate lost
ones, and plan for retirement;
The Netherlands: To help individuals track multiple accounts, locate
lost ones and plan for retirement[B];
Belgium: To give government information for tax and social policy
purposes and find lost accounts;
Australia: To help individuals track multiple accounts and locate lost
ones, and encourage consolidation.
Source: GAO analysis of documentation of pension registries in other
countries and interviews with government officials and other
stakeholders in the listed countries. GAO-15-73.
[A] A representative of one Belgian plan said information on national
retirement benefits (equivalent to Social Security in the United
States) are planned to be incorporated into Belgium's pension registry
in 2016.
[B] Representatives of the Dutch industry association said their
pension registry can give participants a clearer understanding of
their finances in retirement, and helps manage their expectations.
They said many Dutch citizens believe their pension income will be 70
percent of their working income, when it will actually be just 40 or
50 percent.
[End of table]
Denmark--Denmark's pension registry incorporates personal retirement
accounts similar to IRAs in the United States, and facilitates
retirement planning by allowing participants to see how their
financial security in retirement varies with factors like retirement
age and spend-down option, according to documentation provided by
Danish officials.[Footnote 71] Although the Danish pension registry is
a private non-profit organization financed by participating pension
providers, it also works with the government to provide data on public
retirement benefits (see figure 11).[Footnote 72]
Figure 11: Danish Pension Registry Screenshot:
[Refer to PDF for image: screenshot]
Chosen retirement age;
State old age basic pension (flat rate);
State old age supplementary pension (means tested);
Names of pension providers;
Account numbers;
Tax status icons:
* Income tax;
* Tax exempt;
* Pension tax;
Supplementary information (such as earliest payout age, and duration
of phased withdrawal benefits).
Source: GAO analysis of The Danish Pension Registry PensionsInfo,
[hyperlink, https://www.pensionsinfo.dk]. GAO-15-73.
Note: The Danish pension registry provides Danes with current,
consolidated, retirement account information on their workplace plans,
individual plans, and government retirement benefits online. This
screenshot shows some of the information accessible to participants.
[End of figure]
The Netherlands--Participants have had access to the pension registry
since 2011 using a national digital ID, following the enactment of
legislation in 2006 and 2008. The Dutch Social Insurance Bank worked
for years with the largest pension plans to develop the registry,
though the pension industry in general--including insurance companies
and smaller pension funds--provided input into the registry, according
to industry representatives we interviewed. The pension industry's web
portal collects and consolidates pension information from funds and
insurers when a participant logs in to the system. Participants can
also access national, or government, pension information. The pension
registry does not store the information in a central location because
of security concerns over participants' private information, according
to representatives of the pension registry we interviewed. The
government plans to expand the pension registry into a pension
dashboard that will project retirement benefits under various life
events and allow participants to view their entire financial situation
to facilitate retirement planning. The aim of the expansion is to
increase financial literacy but also affect behavior.
Australia--Participants can access the pension registry, the
SuperSeeker, online using a unique electronic government ID.
Participants can also use a phone service or smart phone application
to get the information, according to the SuperSeeker website. With
SuperSeeker, participants can view all of their workplace retirement
accounts on the web, including active and inactive accounts, and any
lost accounts held by ATO. SuperSeeker can also be used to locate lost
accounts not held by ATO. The content of the registry is generated by
plans, as they are required to report the details of all lost accounts
twice each year to the ATO, in addition to active accounts.
Belgium--Officials told us individual participant access is planned
for 2016 using a national digital signature. They said the law
creating the workplace pension registry was passed in 2006. Pension
providers are required by law to submit workplace pension information
to the registry. An electronic database of national pensions (similar
to Social Security in the United States) already existed for private
sector workers and in 2011, the government included public sector
workers in the database to create a unified national and workplace
pension registry. Starting in 2016, all participants will be able to
securely access the integrated data on both national and workplace
retirement plans, according to Belgian government officials.
The European Commission Is Developing a Pan-European Pension Registry:
European Commission officials told us Denmark has the most advanced
pension registry and, as such, is a model for an international
registry accessible by participants across the European Union. With a
population of over 500 million in 28 member states, the European Union
is more similar to the United States in terms of population and
geographic size than the individual countries we included in our
study, thus the challenges the European Union faces in setting up a
pension registry may be particularly relevant for the United States.
By creating a pan-European pension registry, European Commission
officials said they aim to ensure that workers moving across borders
do not lose portions of their retirement entitlements accrued in
different jobs and countries. According to European Union data, more
European workers are internationally mobile in the labor market, with
the number of economically active European Union citizens working
across borders having increased from 5 million in 2005 to 8 million in
2013. Their accumulated retirement benefits are scattered over several
countries, making it difficult for participants to keep track of them,
and for providers to locate missing participants.
Because some countries in Europe already have pension registries,
European Commission officials said a European registry may involve
linking existing registries together.[Footnote 73] To this end, the
European Commission has hired a consortium of six experienced pension
providers from the Netherlands, Denmark, and Finland to study possible
approaches and come up with a pilot project on cross-border pension
tracking. This Track and Trace Your Pension in Europe project
presented its initial findings in support of a European Tracking
Service to the European Commission. The track and trace project found
no uniform approach to pension tracking in the European Union.
Although 16 countries report having a national pension tracking
service, according to track and trace project documentation, these
vary substantially in terms of functionality, coverage, service level,
and complexity.
The European Commission expects to face challenges implementing a
pension registry in the European Union because tax laws and languages
vary from country to country. European Commission officials said they
face several challenges: the standardization required for all plans in
all European Union countries to interface with the same system, the
data security required for all those involved to trust the system, and
questions about how the system would be financed. For example,
according to the track and trace project's initial findings, few
countries have a standardized format on pension communication, though
most report having legal requirements for providers to inform
participants on a regular basis. These differences across countries
reflect the different levels of maturity of the pension systems across
Europe. European Commission officials noted it is likely to take many
years to standardize data. However, as representatives of the Dutch
Association of Insurers pointed out, unless the trend of increasingly
frequent job changes reverses, a pension registry will only become
more important in the future.
The United States Lacks a Pension Registry That Can Provide New
Opportunities for Participants:
Currently, there is no national pension registry in the United States.
No single agency or group of agencies have responsibility for
developing a pension registry for participants looking for their
accounts, and no coalition of financial firms in the retirement
industry has acted alone in lieu of government involvement. While
projects to provide access to current, consolidated information on
workplace retirement accounts are complete or in the final stages in
other countries, the United States has not undertaken a coordinated
effort to determine how to provide the same to Americans. The current
piecemeal approach involving the Department of Labor (DOL), the
Pension Benefit Guaranty Corporation (PBGC), Health and Human Services
(HHS), and the Social Security Administration (SSA) is largely
reactive. Participants often turn to DOL, HHS, or PBGC for assistance
once their accounts are lost, and SSA generally only provides
information once participants have reached retirement age. The current
approach also requires a high level of participant engagement with
complex financial information. The current state of financial literacy
in the United States and the field of behavioral economics suggest
that this kind of participant engagement should not be expected. As
discussed earlier, the task of tracking down retirement savings is a
substantial challenge for participants who may lack information that
would allow other entities to help them find accounts. Similarly, the
inactive account information SSA provides pertains to "potential"
benefits, leaving the participant to determine whether they exist or
not.
The pension registries in the countries we reviewed are relatively
proactive, and rely less on participant engagement. Their approach of
providing access to current, consolidated information on all workplace
retirement accounts may help prevent an account from being lost, and
the need for a participant to work with government to find it. That
approach also relies less on participants, as they need not keep
records or update their address with plans to ensure they can later
receive their benefits. For example, Australia was able to develop a
registry that allows a participant to consolidate their benefits
online on a single website, without engaging directly with either plan
or calling a government funded assistance program.
Congress is aware of the problem participants have tracking accounts,
and the Pension Protection Act of 2006 expanded PBGC's Missing
Participant Program.[Footnote 74] Two industry associations have also
suggested that a central database be created that participants can
check to determine whether they have a lost account in any ongoing
plan in addition to any from terminated plans. Some of the groundwork
for consolidating various pieces of information is already in place in
the United States through large service providers that manage data on
thousands of plans and millions of account holders. For example,
information on retirement savings in many IRAs, workplace plans, and
Social Security is already accessed online. While the U.S. retirement
system is different from those in the countries with pension
registries we studied, and the appropriate scope, oversight, and
financing method for a pension registry in the United States have not
been determined, the variety of examples in place in the countries we
reviewed provide ideas to consider. Currently, DOL and other federal
agencies do not have any ongoing efforts to develop such a registry.
Until there is a concerted effort to determine the potential for a
U.S. pension registry, it may be premature to say whether U.S. workers
can benefit from the same information as participants in some other
countries.
Conclusions:
The United States has a highly mobile labor force and an economy
marked by frequent business formations and failures. The accessibility
and portability of the U.S. account-based 401(k) plan system
presumably allow participants to retain and manage their retirement
assets throughout their careers, even with multiple job changes.
However, there are some significant limitations with regard to
portability and information access as a result of the current
structure and rules of the 401(k) plan system. Given the expected
continued growth of this system and the expansion of automatic
enrollment, the number of inactive participants and inactive accounts--
and the associated challenges--will almost certainly grow,
exacerbating inefficiency and eroding the retirement security of U.S.
workers.
Under current law, there is no mechanism in place that would allow
plans or regulators to develop or consider additional default
destinations when employees are forced out of 401(k) plans. Although
other countries' approaches pose implementation challenges within the
United States, there may be ways that DOL and Treasury, if given the
authority to do so, can revise the current forced-transfer model to
help achieve better financial outcomes for participants while still
providing plans with administrative relief.
Another way to protect participants' 401(k) plan savings is by
ensuring that all accounts with balances over $5,000 may remain in the
plan environment, even when portions of those balances are from
rollovers. Current law addresses the needs of plans and participants
by alleviating the burden on plans of maintaining small, inactive
accounts, while protecting participants with large balances from
forced transfer. Changing the law so that active plans can no longer
force-transfer accounts with balances over $5,000 by disregarding
rollovers can extend current protections to all accounts of that size,
while at the same time continuing to provide plans relief from
maintaining small, inactive accounts. Regardless of the size of the
balance that is transferred into a forced-transfer IRA, one way to
partially mitigate the problems with these accounts is to broaden the
investment options for these accounts from the limited conservative
menu currently available. DOL can take steps to expand the menu of
investment options available under its safe harbor regulations, to
include alternatives similar to those available to automatically
enrolled 401(k) plan participants. This would enable forced-transfer
IRAs to be better protected from erosion by fees and inflation and
provide better long-term outcomes for participants.
Workforce mobility and frequent changes in corporate structure can
result in forgotten accounts, missing participants, and ultimately,
lost retirement savings. Participants often have difficulty locating
accounts in plans with former employers, especially those employers
that have undergone some type of corporate restructuring. SSA holds
critical information on accounts left in former employers' plans, but
individuals rarely see that information before retirement and may be
unaware that the information exists. As time passes, the information
can become outdated and, therefore, less useful to participants trying
to locate their retirement savings. Making this information easier to
access and available sooner--such as by using the online system for
Social Security earnings and benefit statements--can provide
participants with a timelier reminder of accounts left in former
employers' plans and provide them better opportunities for keeping
track of accounts and improving their retirement security.
The lack of a simple way for participants to access information about
their retirement accounts is a central problem of our current
workplace retirement system. We found that other countries with robust
private account-based retirement systems have been grappling with this
challenge and have determined that pension registries can provide a
meaningful long-term solution. Creating an accurate, easy to access,
and easy to use pension registry in the United States would need to
take into account important design challenges, including the scope of
the data to be included, the entity that would oversee the registry,
and how it would be financed. Designing a registry would also require
serious discussions among the key stakeholders, including industry
professionals, plan sponsor representatives, consumer representatives,
and federal government stakeholders on what such a system should look
like in the American context. However, the creation of a viable,
effective registry in the United States could provide vital
information regarding retirement security in a single location to
millions of American workers.
Matters for Congressional Consideration:
To better protect the retirement savings of individuals who change
jobs, while retaining policies that provide 401(k) plans relief from
maintaining small, inactive accounts, Congress should consider
amending current law to:
1. Permit the Secretary of Labor and the Secretary of the Treasury to
identify and designate alternative default destinations for forced
transfers greater than $1,000, should they deem them more advantageous
for participants.
2. Repeal the provision that allows plans to disregard amounts
attributable to rollovers when determining if a participant's plan
balance is small enough to forcibly transfer it.
Recommendations for Executive Action:
To ensure that 401(k) plan participants have timely and adequate
information to keep track of all their workplace retirement accounts,
we recommend that the Social Security Administration's Acting
Commissioner make information on potential vested plan benefits more
accessible to individuals before retirement. For example, the agency
could consolidate information on potential vested benefits, currently
sent in the Potential Private Retirement Benefit Information notice,
with the information provided in the Social Security earnings and
benefits statement.
To prevent forced-transfer IRA balances from decreasing due to the low
returns of the investment options currently permitted under the
Department of Labor's safe harbor regulation, we recommend that the
Secretary of Labor expand the investment alternatives available. For
example, the forced-transfer IRA safe harbor regulations could be
revised to include investment options currently under the qualified
default investment alternatives regulation applicable to automatic
enrollment, and permit forced-transfer IRA providers to change the
investments for IRAs already established.
To ensure that individuals have access to consolidated online
information about their multiple 401(k) plan accounts, we recommend
that the Secretary of Labor convene a taskforce to consider
establishing a national pension registry. The taskforce could include
industry professionals, plan sponsor representatives, consumer
representatives, and relevant federal government stakeholders, such as
representatives from SSA, PBGC, and IRS, who could identify areas to
be addressed through the regulatory process, as well as those that may
require legislative action.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Department of Labor, the
Social Security Administration, the Department of the Treasury, the
Internal Revenue Service, the Pension Benefit Guaranty Corporation,
the Securities and Exchange Commission, and the Consumer Financial
Protection Bureau. DOL, SSA, Treasury and IRS, PBGC, and SEC provided
technical comments, which we have incorporated where appropriate. DOL
and SSA also provided formal comments, which are reproduced in
appendices VIII and IX, respectively. CFPB did not have any comments.
GAO Response to DOL Comments:
DOL agreed to evaluate the possibility of convening a taskforce to
consider the establishment of a national pension registry. We
appreciate that DOL shares our concerns and agrees that there is need
for a comprehensive solution to problems related to missing and
unresponsive participants. DOL stated, however, that it does not have
the authority to establish or fund a registry. Specifically, DOL noted
that it does not have authority to require reporting of the
information needed for a registry or to arrange for the consolidation
of retirement account information from multiple agencies. We reached
the same conclusion and for that reason recommended a taskforce as a
starting point for the development of a national pension registry. In
fact, our recommendation noted that one role for the taskforce would
be identifying areas that could be addressed through the regulatory
process and those requiring legislative action. DOL also noted that an
expansion of PBGC's missing participant program to include defined
contribution plans could address some of these issues. It is our view
that there may be a number of policies or programs that could address
these problems and we agree that an expansion of PBGC's program could
ultimately be part of a comprehensive solution. Should the taskforce
determine that the most appropriate option or options require
additional authority for DOL or other agencies, such options should be
given careful congressional consideration.
DOL disagreed with our recommendation to expand the investment
alternatives available under the safe harbor for plan sponsors using
forced transfers. While DOL characterized our recommendation as
calling for the safe harbor to include qualified default investment
alternatives, our recommendation is to "expand the investment options
available" and we noted that qualified default investment alternatives
could be one option. DOL stated that the limited investments under the
safe harbor are appropriate because Congress' intent for the safe
harbor was to preserve principal transferred out of plans.
Particularly, DOL noted that given the small balances and the
inability of absent participants to monitor investments, the current
conservative investment options are a more appropriate way to preserve
principal.
However, as we show in the report on pages 13-17, the current forced-
transfer IRA investment options like money market funds can protect
principal from investment risk, but not from the risk that fees (no
matter how reasonable) and inflation can result in decreased account
balances due to returns on these small balance accounts not keeping
pace with fees. Consequently, as our analysis shows and as several
forced-transfer IRA providers told us, the reality has been that many
forced-transfer IRAs have experienced very large and even complete
declines in principal.
Regarding our analysis, DOL stated that the performance information
that we used to illustrate the effects of low returns on forced-
transfer IRAs on pages 13-17 and 24-25 covers too short a period and
does not reflect the periodic higher returns earned by money market
funds in the more distant past. Our projection in figure 2, p.17,
showing the effect of returns from a money market investment versus a
target date fund investment on a small balance over 30 years used 10-
year mean returns for these investments. Given that the safe harbor
for these accounts was issued 10 years ago in 2004, we feel a 10-year
average is more appropriate and accurately reflects the returns
earned. However, using a longer time period does not materially change
our conclusions. A similar calculation using a 15-year mean return
shows that these forced-transfer IRA accounts would still not be
preserved. (See notes under figure 2, p.17, and fig 5, p.24-25.)
In any case, our recommendation did not aim to eliminate money market
funds from investments covered by the safe harbor but to expand the
investment alternatives available so that plans and providers that
want to operate under the safe harbor have the opportunity to choose
the most suitable investment. We stand by our recommendation and
encourage DOL to expand the safe harbor to include investment
alternatives more likely to preserve principal and even increase it
over time. Qualified default investment alternatives could be one
option, although certainly not the only one, that could be considered.
GAO Response to SSA Comments:
SSA disagreed with our recommendation to make information on potential
private retirement benefits more accessible to individuals before
retirement. SSA was concerned that our recommendation would place the
agency in the position of having to respond to public queries about
ERISA. SSA noted that the agency has no firsthand legal or operational
knowledge of pension plans or the private pension system and should
not be in a position of responding to questions of that nature or
about ERISA, which it considered to be outside the scope of SSA's
mission. We agree with SSA's view about providing information or
advice about private pension plans generally. However, as SSA noted,
the Notice of Potential Private Retirement Benefit Information
(referred to as the "ERISA notice" in SSA's letter) already directs
recipients to contact DOL with any questions. We would expect that any
changes made to make information on potential vested plan benefits
more accessible to individuals before retirement would continue to
direct recipients to contact DOL with questions about ERISA policy.
SSA stated that it will seek legal guidance to determine if it is
permissible to include a general statement encouraging potential
beneficiaries to pursue any external pension benefits in its benefit
Statement. As noted in our report on pages 34-35, individuals may be
unaware of the availability of information on potential retirement
benefits, therefore we support SSA's initiative to include language in
the Statement encouraging potential beneficiaries to pursue external
pension benefits. SSA also stated that there is no interface between
potential private retirement information and Social Security benefits.
However, as noted in our report on page 35, SSA already stores the
potential vested benefits data and provides the information in the
Statement. Consolidating the two types of information and making it
available every 5 years can provide participants with timely and
adequate information to keep track of all of their work place
retirement accounts and could possibly lead to administrative
efficiencies. Therefore, it may be appropriate for SSA to explore its
concern about its legal authority to expend appropriated funds to
disclose information that it already provides to the relevant
beneficiary, on a more frequent basis and in a more consolidated
manner. We continue to believe that this recommendation could enhance
the retirement security of millions of Americans, who would benefit
from the assistance in keeping track of their multiple accounts from
multiple employers and becoming more knowledgeable about funds they
may be due in retirement. Should SSA determine that they have
authority to implement this legislation, we would strongly urge the
agency's action. However, should SSA decide that it does not have the
authority to move ahead on this recommendation, we would urge the
agency to seek the necessary statutory authority.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to the
Secretary of Labor, Acting Commissioner of the Social Security
Administration, Secretary of the Treasury, Commissioner of Internal
Revenue, Acting Director of the Pension Benefit Guaranty Corporation,
Chair of the Securities and Exchange Commission, Director of the
Consumer Financial Protection Bureau, and other interested parties. In
addition, the report will be available at no charge on the GAO website
at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-7215 or jeszeckc@gao.gov Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made key contributions
to this report are listed in appendix IX.
Signed by:
Charles Jeszeck, Director:
Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
This report examines (1) what happens to forced-transfer individual
retirement accounts (IRA) over time; (2) the challenges 401(k) plan
participants face keeping track of their retirement savings and what,
if anything, is being done to help them; and (3) how other countries
address the challenges of inactive accounts.
To understand what happens to forced-transfer IRAs over time, as well
as challenges 401(k) plan participants face keeping track of multiple
401(k) plan accounts, we reviewed relevant data from government,
research, and industry sources. Because we found no comprehensive data
on the number of IRA accounts opened as a result of forced transfers
or other data relevant to their use and management, we collected data
from a non-generalizeable group of 10 providers of forced-transfer
IRAs about their practices and outcomes, including three of the
largest IRA providers. There is no comprehensive list of all forced-
transfer IRA providers. For this reason, we built a list of forced-
transfer IRA providers through interviews with industry professionals,
a review of IRA market data, and online searches. Our objective was to
create a group that would cover a large share of assets in the forced-
transfer IRA market and represent both small and large forced-transfer
IRA providers in terms of company size. We reached out to the largest
IRA providers by assets under management, as well as all small forced-
transfer IRA providers on our list. We obtained forced-transfer IRA
account data from 10 forced-transfer IRA providers that represent this
mix of characteristics. We also interviewed plan sponsor groups,
401(k) plan industry groups, research entities, consumer groups, and
six federal agencies (Consumer Financial Protection Bureau, Department
of Labor, Department of the Treasury, Pension Benefit Guaranty
Corporation, Securities and Exchange Commission, and Social Security
Administration) about plans' use of forced-transfer IRAs and what
challenges individuals and plans face related to inactive accounts and
multiple accounts in the United States. We also reviewed research and
industry literature, relevant laws and regulations, 2013 ERISA
Advisory Council[Footnote 75] testimony on missing participants,
industry whitepapers on a proposed default roll-in system, and
submissions to the 2013 Pension Benefit Guaranty Corporation request
for information related to a tracking system for distributions from
terminating plans.
To understand what happens to forced-transfer IRA accounts over time,
we constructed projections of what would happen to an account balance
year to year, given certain assumptions. We drew those assumptions
from the actual forced-transfer IRA account terms provided by
providers we interviewed and on which we collected data. We used the
account opening fee, annual fee, search fees, and rate of investment
return to project how long it would take for a $1,000 balance to
decrease to zero. While the range of average balances transferred into
forced-transfer IRAs reported by providers we interviewed was $1,850
to $3,900, we used a $1,000 balance for our projection to make it
easier to observe the difference in values over time shown in the
projection.[Footnote 76] Appendix III shows the projected outcome for
a $1,000 balance given the fee and return information reported by the
forced-transfer IRA providers we contacted.
To determine how forced-transfer IRAs are used, as described in
appendix II, we projected the balance of a typical low-wage worker at
the end of a typical tenure given certain assumptions about savings,
investment returns, and employer matching and vesting policies.
Specifically, we wanted to see if the projected balance would fall
below the $5,000 cap used to determine eligibility for forced
transfers. The projections assume the annual mean wage in 2013 for the
service sector occupation with the most workers, specifically "food
preparation and serving related occupations," including an annual
raise equal to the average annual increase in wage over 15 years (1999-
2013). For these assumptions, we referred to the U.S. Bureau of Labor
Statistics' (BLS) Occupational Employment Statistics, National
Employment and Wage Estimates. The Occupational Employment Statistics
survey covers all full-time and part-time wage and salary workers in
nonfarm industries. The survey does not cover the self-employed,
owners and partners in unincorporated firms, household workers, or
unpaid family workers. We assumed the 2014 median tenure for employed
workers in the food preparation-and serving-related occupations,
according to BLS data. We also assumed that employer contributions,
when there were any, were made concurrently with employer
contributions, rather than on a separate periodic or annual basis.
These projected savings also reflect a 6.3 percent investment return,
which is the geometric mean of 10-year returns for all target date
funds according to our analysis of data from Morningstar.com. Target
date funds are the most common default investment for individuals
automatically enrolled into 401(k) plans, according to the Plan
Sponsor Council of America's (55th) Annual Survey of Profit Sharing
and 401(k) Plans, which reflects the 2011 plan experience. We used
optimistic, moderate, and pessimistic assumptions to project vested
balances (see appendix IV for additional details on our assumptions).
To estimate the number and the value of accounts that could
potentially be--but were not already--transferred to forced-transfer
IRAs, we collected Social Security Administration (SSA) data from the
form 8955-SSA. Data on the form 8955-SSA include deferred vested
benefits in all defined contribution plans, including 401(k) plans, as
well as in defined benefit plans, which are not subject to forced
transfers. We assessed the reliability of the data and found that it
met our standards, given our use of the data. We previously reported
that data from the form 8955-SSA on potential private sector pension
benefits retirees may be owed by former employers are not always
updated or verified over time and may not reflect later distributions
from plans, such as rollovers to a new plan or cash-outs. We also
asked PLANSPONSOR.com to include questions about plan sponsors' use of
forced transfers in its newsletter, which is distributed to online
subscribers. Respondents to the query included 14 plan sponsors and 4
third-party administrators/record keepers. To assess the reliability
of the data we analyzed, we reviewed IRA market data and interviewed
IRA providers familiar with forced-transfer IRAs. We determined that
these data were sufficiently reliable for the purposes of this report.
To better understand forced-transfer IRAs, as well as the challenges
people face in keeping track of multiple 401(k) plan accounts, we also
interviewed plan sponsor groups, 401(k) plan industry groups, research
entities, consumer groups, and six federal agencies (Department of
Labor, Department of the Treasury, Social Security Administration,
Pension Benefit Guaranty Corporation (PBGC), Securities and Exchange
Commission, and Consumer Financial Protection Bureau) about plans' use
of forced-transfer IRAs and what challenges individuals and plans face
related to multiple accounts and inactive accounts in the United
States. We also reviewed research and industry literature, relevant
laws and regulations, 2013 Employee Retirement Income Security Act
Advisory Council testimony on missing participants, industry
whitepapers on a proposed default roll-in system, and submissions to
the 2013 PBGC request for information related to a tracking system for
distributions from terminating plans.
To examine how other countries are addressing challenges of inactive
accounts, we selected six countries to study. We considered countries
with extensive workplace retirement systems to include populations
that might face challenges similar to those of U.S. participants. To
make our selections, we reviewed publicly available research and
interviewed researchers, consumer groups, industry groups, and
government agencies. We considered the extent to which countries
appeared to have implemented innovative policies to help individuals
keep track of their retirement savings accounts over their careers,
reduce the number of forgotten or lost accounts, make such accounts
easier to find, and improve outcomes for those with lost accounts. We
also considered how recently legislated or implemented solutions were
adopted given the increasingly powerful role information technology
can play in connecting individuals with information. On the basis of
this initial review, we selected six countries--Australia, Belgium,
Denmark, the Netherlands, Switzerland, and the United Kingdom--that
could potentially provide lessons for the United States. We
interviewed government officials and industry representatives from all
the selected countries. We did not conduct independent legal analyses
to verify information provided about the laws or regulations in the
countries selected for this study. Instead, we relied on appropriate
secondary sources, interviews, and other sources to support our work.
We submitted key report excerpts to agency officials in each country
for their review and verification, and we incorporated their technical
corrections as necessary.
We conducted this performance audit from May 2013 to November 2014 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for findings
and conclusions based on our audit objectives.
[End of section]
Appendix II: Use of Forced-Transfer IRAs:
Active plans force out separated participants primarily to reduce plan
costs, administrative burden, and liability. In response to a poll
conducted by PLANSPONSOR.com through its newsletter, some respondents
(made up of both plans and third party administrators) indicated that
plans chose to use forced transfers for balances of $5,000 or less
because they wanted to reduce costs from having additional
participants who have small accounts.[Footnote 77] Specifically, plans
pay fees based on the total number of participants or on the average
plan balance. The administrative burden on plans is another incentive
to force out participants with inactive accounts, absent participant
instruction, into forced-transfer IRAs. Other respondents to
PLANSPONSOR.com's query reported that they used forced transfers
because they wanted to reduce the complexity and administrative
responsibilities associated with locating separated, non cashed-out
participants. Also, small plans may wish to avoid the additional
disclosure requirements and expenses associated with separated
employees. In addition, active plans may opt to force out separated
participants with eligible balances to reduce the plans' legal
liability related to those individuals. Lastly, plans also use forced-
transfer IRAs to help reduce their ongoing responsibility with regard
to uncashed checks.[Footnote 78]
When transferring an account into a forced-transfer IRA, a plan must
first notify the participant of its intention to forcibly transfer the
account and that if the participant does not instruct otherwise, the
account will be transferred into a forced-transfer IRA.[Footnote 79]
An example of such a notice is shown in appendix V. See figure 12 for
an example of how the forced-transfer IRA process works for active
401(k) plans.
Figure 12: Forced-Transfer IRA Process for Active 401(k) Plans:
[Refer to PDF for image: process illustration]
1. A plan can decide to force out a separated participant when the
participant's vested balance is not over $5,000.
2. Plan sends participant an IRS 402(f)[A] notice and a letter asking
what should be done with the funds:
Participant provides instruction: Participant can cash out or transfer
the funds to a new plan or an Individual Retirement Account (IRA);
Participant does not provide instruction: continue.
3. Distribution rules vary depending on balance in participant's
account:
More than $1,000: Plan must transfer the participant's balance to a
forced-transfer IRA[B];
$1,000 or less: continue.
4. Plan decides how participant's balance will be disbursed:
Force-out IRA: After a 30-day waiting period: Forced-transfer IRA
provider opens account, attempts to notify participant, and share
instructions for access;
Check: Plan pays participant after deducting 20% for taxes and
additional funds for any penalties or fees[C].
Source: GAO interviews with forced-transfer IRA providers and GAO
review of select laws and regulations. GAO-15-73.
[A] Plans are required by statute to provide participants with a
written explanation of various tax consequences resulting from a
distribution to the participant of funds from the plan prior to any
such distribution. 26 U.S.C. § 402(f).
[B] The Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA) amended the law to require plans forcing out participants
with balances of more than $1,000 to transfer those balances to
individual retirement accounts. 26 U.S.C. § 401(a)(31)(B). The
Department of Labor promulgated safe harbor regulations for such a
transfer that describe the characteristics of a forced-transfer IRA.
29 C.F.R. § 2550.404a-2.
[C] The Internal Revenue Code applies a 10 percent penalty on
individuals who take a taxable distribution from their plan or IRA
prior to turning age of 59½. 26 U.S.C. § 72(t).
[End of figure]
Although a plan must try to locate a missing participant before
seeking to force the participant out of the plan, actually forcing
such a participant out of the plan and initiating the forced transfer
to an IRA does not require any additional last-ditch efforts to locate
the participant.[Footnote 80] For example, a plan might get back some
returned plan communications mailed to a separated participant and
search unsuccessfully for an updated address. Later, when that plan
sweeps out the balances of separated participants, the plan is not
required to search again for the missing participant. Instead, efforts
to locate the missing participant are at the discretion of the
provider and generally at the expense of the individual participant's
balance.[Footnote 81]
Active 401(k) Plans Forcibly Transfer Billions of Dollars in Separated
Participants' Savings:
One industry survey shows that about half of active 401(k) plans force
out separated participants with balances of $1,000 to $5,000.[Footnote
82] We collected forced-transfer IRA account data from 10 IRA
providers that have, together, opened more than 1.8 million forced-
transfer IRA accounts totaling $3.4 billion in retirement savings, as
of 2013.[Footnote 83] One of the largest forced-transfer IRA providers
has projected that more than 600,000 new forced-transfer IRAs could be
created each year, given attrition rates, the percentage of vested
balances under $5,000, and the rate of non-responsiveness among
separating participants faced with making a distribution choice. Based
on that estimate and assuming an average account balance of $2,500
(half of the $5,000 cap), a total of $1.5 billion would be transferred
into these accounts each year.
Data provided by SSA are consistent with those estimates. From 2004 to
2013, separated participants left more than 16 million accounts of
$5,000 or less in workplace retirement plans, with an aggregate value
of $8.5 billion.[Footnote 84] Those data reflect both defined
contribution and defined benefit plans, but even if a portion of the
accounts are in defined contribution plans, it suggests that there are
millions of accounts and billions in savings that could be transferred
to IRAs if those plans choose to retroactively force transfer eligible
accounts.[Footnote 85]
Although the plans reflected in SSA's data had not yet forcibly
transferred these small accounts, the defined contribution plans may
still do so. For example, a plan may choose to sweep out eligible
accounts once a year or on some periodic basis.
Plans' use of forced-transfer IRAs is also increasing. Some forced-
transfer IRA providers have seen the number of new forced-transfer
IRAs increase each year. In addition, the largest of the specialty
providers we interviewed said that the number of new forced-transfer
IRAs that they administered increased nearly 300 percent over 5 years,
from 26,011 new accounts in 2008 to 103,229 in 2012.[Footnote 86] They
expect that upward trend to continue. Industry professionals also said
that the wider use of automatic enrollment has the potential to result
in greater use of forced-transfer IRAs, as participants who are
relatively unengaged, and thus less likely to make a choice about
where to transfer their savings, are forced out by plans when they
separate.
Finally, some plans do not yet force out participants because their
plan documents do not, as required,[Footnote 87] include provisions
for forcing them out and transferring their eligible 401(k) plan
accounts into forced-transfer IRAs. The PSCA survey of 401(k) plans
stated that about 40 percent of plans do not currently force out
participants with balances of $1,000 to $5,000.[Footnote 88] If these
plans begin to use forced transfers, they can force out participants
with eligible balances going forward and go back and sweep out
participants who left small accounts years ago. Thus, anyone with a
small balance left with a past employer's 401(k) plan could find
themselves notified of the plan's intention to force them out--no
matter how long ago their separation--and of a potential transfer to
an forced-transfer IRA.
Forced-Transfer IRAs Are Used to a Lesser Extent by Terminating Plans:
Several forced-transfer IRA providers we spoke with said that forced
transfers from terminating plans represent a small part of their
forced-transfer IRA business. For example, one provider said that
terminated plan transfers constitute 9 percent of the provider's
forced-transfer IRAs. Some providers do not offer forced-transfer IRAs
to terminating plans. One of the largest providers told us that it
offers forced-transfer IRAs as an accommodation to ongoing plan
sponsor clients, but typically does not offer them if the plan is
terminating.[Footnote 89] In some cases, forced-transfer IRA providers
will provide the accounts for terminating plans that cannot secure a
contract with a larger service provider.
Despite the limited use of forced-transfer IRAs by terminating plans,
they have prescriptive requirements[Footnote 90] for notifying
participants prior to the forced transfer of balances, which include
using certified mail, reviewing other employee benefit plan records
for more up-to-date information, and contacting the designated
beneficiary to get more accurate contact information. As a result,
participants in terminating plans are more likely to have an
opportunity to select a distribution destination other than a forced-
transfer IRA or individual retirement annuity.
[End of section]
Appendix III: Projected Outcome of a $1,000 Balance Left in a Forced-
Transfer IRA for 30 Years:
Through interviews, data requests, and web research we collected
forced-transfer IRA terms for 10 forced-transfer IRA providers. Almost
all providers offer varying account terms for different forced-
transfer IRAs. In all, there were 19 different account terms from the
10 providers for which we collected data. We collected data on account
opening fees, initial address search fees, ongoing account fees,
ongoing address search fees, and investment returns. Some forced-
transfer IRA providers also charge fees for certain transactions,
including distributions and account closings, but we did not
incorporate them into our projections, which show the effect of the
account terms if the account holder takes no action and the balance
remains in the forced-transfer IRA. While not all forced-transfer IRA
terms result in the balance decreasing to $0 over 30 years, the growth
of those account balances is less than would have resulted had the
funds been invested in a typical target date fund. In contrast to the
projected outcomes shown in table 7, the projected balance of $1,000
in a forced-transfer IRA with a $6.75 set-up fee, a $42 annual fee
(the median fees among the combinations we reviewed), and a 6.30
percent average target date return,[Footnote 91] would be $2,708 after
30 years or growth of 173 percent.
Table 7: The Projected Balance of a $1,000 Forced-Transfer IRA after
30 years, Given 19 Combinations of Account Fees and Investment Returns
for 10 Providers:
Time to decrease to $0: 9 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: $50 set up fee; $50
annual fee; $65 annual search fee, 0.01% of assets;
Investment returns: 0.11%.
Time to decrease to $0: 9 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: $50 set up fee; $50
annual fee; $65 annual search fee; 0.01% of assets;
Investment returns: 0.04%.
Time to decrease to $0: 9 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: $50 set up fee; $50
annual fee; $65 annual search fee, 0.01% of assets;
Investment returns: 1.5%.
Time to decrease to $0: 9 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: $50 set up fee; $50
annual fee; $65 annual search fee, 0.01% of assets;
Investment returns: 0.15%.
Time to decrease to $0: 15 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: No set up fee; $60
annual fee; $18 annual search fee; 0.35% assets fee;
Investment returns: 2.05%.
Time to decrease to $0: 20 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: 20% balance set up
fee, $45 annual fee;
Investment returns: 1.0%.
Time to decrease to $0: 22 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: $30 set up fee;
$45 annual fee;
Investment returns: 0.05%.
Time to decrease to $0: 24 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: No set up fee;
$3.50 per month ($42 per year) account fee;
Investment returns: 0.05%.
Time to decrease to $0: 24 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: No set up fee;
$45 annual fee;
Investment returns: 0.01%.
Time to decrease to $0: 25 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: No set up fee, $35
initial search fee, $45 annual fee;
Investment returns: 1.0%.
Time to decrease to $0: 29 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: $10 set up fee, $35
annual fee;
Investment returns: 0.05%.
Time to decrease to $0: 29 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: No set up fee, $35
annual fee;
Investment returns: 0.01%.
Time to decrease to $0: 29 years;
Time to decrease to $0 or, the balance remaining after 30 years: $0;
Terms of the Forced-Transfer IRA, including fees: No set up fee, $35
annual fee;
Investment returns: 0.05%.
Time to decrease to $0 or, the balance remaining after 30 years: $422;
Terms of the Forced-Transfer IRA, including fees: No set up fee, $20
annual fee;
Investment returns: 0.1%.
Time to decrease to $0 or, the balance remaining after 30 years: $553;
Terms of the Forced-Transfer IRA, including fees: $25 set up fee, $15
annual fee;
Investment returns: 0.12%.
Time to decrease to $0 or, the balance remaining after 30 years: $572;
Terms of the Forced-Transfer IRA, including fees: $25 set up fee, $15
annual fee;
Investment returns: 0.2%.
Time to decrease to $0 or, the balance remaining after 30 years:
($996.50) [A];
Terms of the Forced-Transfer IRA, including fees: No set up fee, $3.50
initial search fee, $35 annual fee or capped at return;
Investment returns: 0.5%.
Time to decrease to $0 or, the balance remaining after 30 years:
$1,006;
Terms of the Forced-Transfer IRA, including fees: No set up fee;
no annual fee;
Investment returns: 0.02%.
Time to decrease to $0 or, the balance remaining after 30 years:
$1,678;
Terms of the Forced-Transfer IRA, including fees: No set up fee;
no annual fee;
Investment returns: 1.74%.
Source: GAO analysis of forced-transfer IRA account fee and return
data collected for ten providers. GAO-15-73.
Notes: Percentage is shown by the sign '%'. The gray line
distinguishes those 17 combinations of fees and investment returns
that resulted in a decreased value over time versus those 2 that
resulted in some increase in value over time. Actual annual returns
would not remain the same for 30 years, they could go up or down, but
these projections reflect what could happen given the most recent
returns reported by providers.
[A] In this scenario the balance neither increases nor decreases over
time because--unless the return exceeds the $35 annual fee--the fee is
capped at the return, which is just $4.98 each year on a $996.50
balance.
[End of table]
[End of section]
Appendix IV: Projected Vested Retirement Savings of a Low-Wage 401(k)
Plan Participant Given Pessimistic, Moderate, and Optimistic
Assumptions (Table):
Vested balance after 2.2 year tenure assuming a policy of:
Pessimistic[A]; 3% employee contribution; no employer match (so
vesting is not relevant); 6-month service requirement;
Immediate vesting: $1,282;
3-year cliff vesting[D]: $1,282;
5-year graduated vesting[D]: $1,282;
6-year graduated vesting[D]: $1,282.
Moderate[B]; 3% employee contribution; 50% employer match up to 6% of
salary; 3-month service requirement;
Immediate vesting: $2,214;
3-year cliff vesting[D]: $1,476;
5-year graduated vesting[D]: $1,661;
6-year graduated vesting[D]: $1,624.
Optimistic[C]; 5.2% employee contribution; 50% employer match; up to
6% of salary; no service requirement;
Immediate vesting: $4,344;
3-year cliff vesting[D]: $2,896;
5-year graduated vesting[D]: $3,258;
6-year graduated vesting[D]: $3,185.
Source: GAO projections based on analysis of industry and government
data. GAO-15-73.
Notes: The projections assume the annual mean wage in 2013 ($21,580)
for the service sector occupation with the most workers, specifically
"food preparation and serving related occupations," including an
annual raise of 2.36 percent, which is the average annual increase in
wage over 15 years (1999-2013). For these assumptions, we referred to
the U.S. Bureau of Labor Statistics' (BLS) Occupational Employment
Statistics, National Employment and Wage Estimates. We assumed a 2.2
year tenure, which is the 2014 median tenure for employed workers in
the food preparation-and serving-related occupations, according to BLS
data. We also assumed that employer contributions, when there were
any, were made concurrently with employer contributions, rather than
on a separate periodic or annual basis. More than half of defined
contribution plans (such as 401(k) plans) are in the service sector
and about 40 percent of defined contribution plan participants work in
the service sector, according to 2011 data published by the Employee
Benefits Security Administration. These projected savings also reflect
a 6.3 percent investment return, which is the geometric mean of 10
year returns for all target date funds according to our analysis of
data from Morningstar.com. Target date funds are the most popular
default investment for individuals automatically enrolled into 401(k)
plans, according to the PSCA's 55th Annual Survey of Profit Sharing
and 401(k) Plans, which reflects the 2011 plan experience.
[A] Pessimistic assumptions: This projection assumes a 3 percent
employee contribution, no employer match, and a 6-month service
requirement. About 54 percent of plans that automatically enroll
employees in a retirement savings plan set a default deferral of 3
percent of salary and 30 percent of plans offer no matching employer
contribution, according to the PSCA's 55th Annual Survey of Profit
Sharing and 401(k) Plans. According to the same source, about 20
percent of plans have a service requirement of 6 months or more. The
pessimistic projections do not vary depending on the vesting schedule
because there is no employer contribution assumed in this scenario and
only employer contributions, and investment returns thereon, are
affected by vesting rules. Employee contributions are always
immediately vested.
[B] Moderate assumptions: This projection assumes a 3 percent employee
contribution, a 50 percent employer match, and a 3-month service
requirement. About 54 percent of plans that automatically enroll
employees in a plan set a default deferral of 3 percent of salary and
48 percent of plans offer a 50 percent match, according to data from
the PSCA's 55th Annual Survey of Profit Sharing and 401(k) Plans.
According to the same source, 16.6 percent of plans reported a service
requirement of 3 months.
[C] Optimistic assumptions: We assumed a 5.2 percent employee
contribution, a 50 percent match, and no service requirement. The
average pre-tax salary deferral among non-highly compensated workers
in 2011 was 5.2 percent. A 50 percent match is used by 48 percent of
plans, according to data from the PSCA's 55th Annual Survey of Profit
Sharing and 401(k) Plans. The same source shows that 60 percent of
plans have no service requirement.
[D] Vesting schedules:
* Under 3-year cliff vesting, the employer's contribution and
investment returns thereon are 100 percent vested after 3 years of
service.
* Under graduated vesting, the employer's contribution and investment
returns thereon are partially vested after each year of service,
depending on how long the graduated vesting period is. In our
projections, we used:
- for a 5-year vesting schedule: 0, 25, 50, 75, 100 percent and the
ends of years 2 through 5; and;
- for a 6-year gradated vesting schedule: 0, 20, 40, 60, 80, and 100
percent at the end of years 2 through 6.
[End of table]
[End of section]
Appendix V: Example Notification of Plan Forced-Transfer Policy:
ENV#MIN000001:
Customer Sample:
400 Puritan Way:
Campbellsburg KY 40011:
Action Deadline: 05/25/2012:
Cash Distribution Limit: $5,000.00:
04/05/2012:
Re: Name Of Client: 99999:
Dear Customer Sample:
Important Notice: Action May Be Required By 4pm Eastern Time
05/25/2012.
We are writing in respect to your retirement account in the Plan
listed above. As part of a periodic review, your account has been
identified as having a vested market value equal to or less than your
Plan's minimum required balance of $5000.
Vested Account Balance (subject to distribution): $.77.
In accordance with Plan provisions your vested account balance will be
distributed from the Plan. No action is required unless you would like
to elect a different distribution option than what is outlined below.
If you do not elect to receive a distribution prior to the action
deadline listed above, your account will be distributed as follows:
If you have attained the later of age 82 or your Plan's normal
retirement age, your account will be liquidated and a cash
distribution will be made to you in the fowl of a check. As required
by federal tax law, 20% of the taxable portion of your distribution
will be withheld (state tax withholding may also apply).
If you have not yet attained the later of age 62 or your Plan's normal
retirement age, your account will be distributed as follows:
If your balance is less than or equal to 51,000, a cash distribution
will be made to you in the form of a check. As required by federal tax
law, 20% of the taxable portion of your distribution will be withheld
(state tax withholding may also apply).
If your balance is greater than $1,000, the Plan provides that your
vested account balance be rolled over to an Individual Retirement
Account (IRA) at___. Your rollover will be placed in the fund until
you provide other direction. Important additional information for
participants with Roth and non-Roth balances (Roth may not be offered
by your plan):
The $1,000 rollover limit is applied separately to the Roth and non-
Roth balances. If either your Roth balance or your non-Roth balance is
equal to or less than $1,000, you will receive a check for that
balance.
Example 1) if your account has a $2,000 balance comprised of $1,500 of
non-Roth money and $500 of Roth money, you will receive a check for
the $500 of Roth money, and the $1,500 of non-Roth money will be
rolled over to an IRA.
Example 2) if your account has a $900 balance comprised of $400 of non-
Roth money and $500 of Roth money, then you would receive two checks
as each falls under the $1,000 limit to be automatically rolled over.
Example 3) if your account has a $1,500 Roth balance and a $1,500 non-
Roth balance, $1,500 will be rolled over to a traditional IRA and
$1,500 will be rolled over to a Roth IRA.
Because the value of your account can fluctuate, changes in value
prior to payment may change how your account is handled. The account
balance on the "automatic distribution date" will determine if your
account is to be cashed out or (if it exceeds the Plan's minimum)
remain in the Plan - not the value of the vested account balance when
this letter was issued.
If you will be age 701/2 on or before December 31st, a portion of your
distribution is required to be taken as cash and is not eligible to be
rolled into another retirement account This amount satisfies the
Minimum Required Distribution (MRD) mandated by the IRS. If you elect
to rollover a portion of your funds, a service representative will
inform you of your MRD amount that is not rollover eligible.
Enclosed you will find a Special Tax Notice regarding plan payments
for your reference. You may contact [redacted] to request a
distribution prior to the action deadline noted above. You may log
onto your account at netbenefits.com to review and select distribution
options. For additional service you may call 1.800-[redacted] between
service hours Weekdays 8:30 a.m. - Midnight ET. Please be sure to
understand the tax consequences of any distributions from the Plan. In
the event of a discrepancy between the process outlined in this letter
and the terms of the Plan document, the Plan document shall control.
Company. Inc.
[End of section]
Appendix VI: Selected Reporting and Disclosure Requirements at
Participant Separation and Certain Plan Events (Table):
Cash-out[A] at separation:
Sending entity: Plan;
Receiving entity: Internal Revenue Service (IRS) and Participant;
Form: 1099-R;
Distributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc.;
26 U.S.C. § 6047(d);
26 C.F.R. § 31.3405(c)-1;
Summary description of form contents: Reports distributions made from
retirement plans and Individual Retirement Accounts (IRA). (Note: The
form specifies if the distribution was a direct rollover,[B] including
those from forced transfers, but it does not specify if the
distribution went to a plan or IRA, or to a forced-transfer IRA);
Due to participant by January 31st following the calendar year of the
distribution and to IRS by February 28th of the year following the
calendar year of the distribution.
Cash-out[A] at separation:
Sending entity: Plan;
Receiving entity: Participant;
Form: 402(f) Special Tax Notice; (or Rollover Notice); 26 U.S.C. §
402(f)(1);
Summary description of form contents: Explains the tax implications of
the different distribution options, including explanation of the
rollover rules, the special tax treatment for cash-outs (also called
lump-sum distributions), and the mandatory withholding of 20 percent
of distributions (including those that result in an indirect
rollover)[C].
Cash-out[A] at separation:
Sending entity: Plan;
Receiving entity: Participant *Only required for balances over $5,000;
Form: Notice of Right to Defer Distribution; (Or Participant Consent
Notice); 26 C.F.R. § 1.411(a)-11(c);
Summary description of form contents: Remains in plan at separation:
Notifies participant of right to defer receipt of an immediately
distributable benefit. To obtain participant's consent to distribution
in excess of $5,000 prior to plan's normal retirement age (NRA),
participant must be given a description of the plan's distribution
options and be informed of right to defer distribution and the
consequences of failing to defer[D].
Remains in plan at separation;
Sending entity: Plan;
Receiving entity: IRS;
Form: 8955-SSA; Annual Registration Statement Identifying Separated
Participants with Deferred Vested Benefits; 26 U.S.C. § 6057(a);
Summary description of form contents: Reports separated participants
with deferred vested benefits remaining in the plan and includes name
of plan and plan contact information as well as the value of the
account; (Note: The plan sends the 8955-SSA to IRS, IRS then sends it
to SSA.)
Remains in plan at separation;
Sending entity: Plan;
Receiving entity: Participant;
Form: Individual Statement of Deferred Vested Retirement Benefit;
Summary description of form contents: Includes same information as the
8955-SSA; plan name, name and address of plan administrator, name of
participant, nature, amount and form of the deferred vested benefit.
Transferred to forced-transfer IRA at separation;
Sending entity: Plan;
Receiving entity: IRS and Participant;
Form: 1099-R; Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc,; 26 U.S.C. §
6047(d); 26 C.F.R. § 31.3405(c)-1;
Summary description of form contents: Reports distributions made from
retirement plans and IRAs. (Note: The form specifies if the
distribution was a direct rollover,[B] including those from forced
transfers, but it does not specify if the distribution went to a plan
or IRA, or to a forced-transfer IRA.) Due to participant by January
31st following the calendar year of the distribution and to IRS by
February 28th of the year following the calendar year of the
distribution.
Transferred to forced-transfer IRA at separation;
Sending entity: Plan;
Receiving entity: Participant;
Form: 402(f) Special Tax Notice; (or Rollover Notice); 26 U.S.C. §
402(f)(1);
Summary description of form contents: Explains the tax implications of
the different distribution options, including explanation of the
rollover rules, the special tax treatment for cash-outs (also called
lump-sum distributions), and the mandatory withholding of 20 percent
of distributions (including those that result in an indirect
rollover)[C].
Transferred to forced-transfer IRA at separation;
Sending entity: Plan;
Receiving entity: Participant;
Form: Automatic Rollover Notice;
Summary description of form contents: Notifies participant that,
absent any participant instructions, a distribution will be paid to an
individual retirement plan[E].
Transferred to forced-transfer IRA at separation;
Sending entity: RA;
Receiving entity: IRS and Participant;
Form: 5498; IRA Contribution Information;
Summary description of form contents: Reports contributions,
rollovers, transfers, and recharacterizations, as well as the fair
market value and whether a required minimum distribution is required.
Rollover to new plan;
Sending entity: Plan;
Receiving entity: IRS and Participant;
Form: 1099-R; Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc.; 26 U.S.C. §
6047(d); 26 C.F.R. § 31.3405(c)-1;
Summary description of form contents: Reports distributions made from
retirement plans and IRAs. (Note: The form specifies if the
distribution was a direct rollover,[B] including those from forced
transfers, but it does not specify if the distribution went to a plan
or IRA, or to a forced-transfer IRA.) Due to participant by January
31st following the calendar year of the distribution and to IRS by
February 28th of the year following the calendar year of the
distribution.
Rollover to new plan;
Sending entity: Plan;
Receiving entity: Participant;
Form: 402(f) Special Tax Notice; (or Rollover Notice); 26 U.S.C. §
402(f)(1);
Summary description of form contents: Explains the tax implications of
the different distribution options, including explanation of the
rollover rules, the special tax treatment for cash-outs (also called
lump-sum distributions), and the mandatory withholding of 20 percent
of distributions (including those that result in an indirect
rollover).[C].
Rollover to new plan;
Sending entity: Plan;
Receiving entity: Participant; *Only required for balances over $5,000;
Form: Notice of Right to Defer Distribution;
(Or Participant Consent Notice); 26 C.F.R. § 1.411(a)-11(c) (2012);
Summary description of form contents: Notifies participant of right to
defer receipt of an immediately distributable benefit. To obtain
participant's consent to distribution in excess of $5,000 prior to
plan's NRA, participant must be given a description of the plan's
distribution options and be informed of right to defer distribution
and the consequences of failing to defer[D].
Rollover to IRA;
Sending entity: Plan;
Receiving entity: IRS and Participant;
Form: 1099-R; Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc.; 26 U.S.C. §
6047(d); 26 C.F.R. § 31.3405(c)-1;
Summary description of form contents: Reports distributions made from
retirement plans and IRAs. (Note: The form specifies if the
distribution was a direct rollover,[B] including those from forced
transfers, but it does not specify if the distribution went to a plan
or IRA, or to a forced-transfer IRA); Due to participant by January
31st following the calendar year of the distribution and to IRS by
February 28th of the year following the calendar year of the
distribution.
Rollover to IRA;
Sending entity: Plan;
Receiving entity: Participant;
Form: : 402(f) Special Tax Notice; (or Rollover Notice); 26 U.S.C. §
402(f)(1);
Summary description of form contents: Explains the tax implications of
the different distribution options, including explanation of the
rollover rules, the special tax treatment for cash-outs (also called
lump-sum distributions), and the mandatory withholding of 20 percent
of distributions (including those that result in an indirect
rollover).[C].
Rollover to IRA;
Sending entity: Plan;
Receiving entity: Participant; *Only required for balances over $5,000;
Form: Notice of Right to Defer Distribution; (Or Participant Consent
Notice); 26 C.F.R. § 1.411(a)-11(c) (2012);
Summary description of form contents: Notifies participant of right to
defer receipt of an immediately distributable benefit. To obtain
participant's consent to distribution in excess of $5,000 prior to
plan's NRA, participant must be given a description of the plan's
distribution options and be informed of right to defer distribution
and the consequences of failing to defer[D].
Rollover to IRA;
Sending entity: IRA;
Receiving entity: IRS and Participant;
Form: Plan termination: Form 5498; IRA Contribution Information;
Summary description of form contents: Reports contributions,
rollovers, transfers, and recharacterizations, as well as the fair
market value and whether a required minimum distribution is required.
Plan termination;
Sending entity: Plan;
Receiving entity: IRS;
Form: 5310; Application for Determination for Terminating Plans;
Summary description of form contents: Optional request for a
determination on the plan's qualification status at the time of the
plan's termination.
Plan termination;
Sending entity: Plan;
Receiving entity: Participant;
Form: Notice to Interested Parties; Rev. Proc. 2013-6, 2013-1 I.R.B.
198, corrected by Ann. 2013-13, 2013-9 I.R.B. 532;
Summary description of form contents: Notifies employees, participants
and beneficiaries that an application for determination is being
submitted to the IRS and of their right to comment on the plan; Notice
must be posted or sent (electronic media permissible) before the
application is submitted to the IRS--between 10 and 24 days of the
application date.
Plan termination;
Sending entity: Plan;
Receiving entity: Participant;
Form: Notice of Plan Termination;
Summary description of form contents: Notifies participants and
beneficiaries of the plan's termination and distribution options and
procedures to make an election. In addition, the notice must provide
information about the account balance; explain, if known, what fees,
if any, will be paid from the participant or beneficiary's retirement
plan; and provide the name, address and telephone number of the
individual retirement plan provider, if known, and of the plan
administrator or other fiduciary from whom information about the
termination may be obtained. See 29 C.F.R. § 2550.404a-3;
The notice will be given during the winding up process of the plan
termination. Participants and beneficiaries have 30 days from the
receipt of the notice to elect a form of distribution.
Plan termination;
Sending entity: Plan;
Receiving entity: Department of Labor (DOL), IRS, Pension Benefit
Guaranty Corporation (PBGC);
Form: Final Form 5500, Annual Return/Report of Employee Benefit Plan;
(including any applicable schedules); 26 U.S.C. § 6058(a); 29 U.S.C. §
1024;
Summary description of form contents: Indicates when all assets under
the plan have been distributed when "final return/report" box on the
form 5500 is checked. Indicates that all assets were distributed and
current value of assets at the date of distribution via schedule H
(for plans with 100 or more participants) and schedule I (plans with
less than 100 participants).
Plan merger, etc;
Sending entity: Plan;
Receiving entity: IRS;
Form: 5310-A; Notice of Plan Merger or Consolidation, Spinoff, or
Transfer of Plan Assets or Liabilities; Notice of Qualified Separate
Lines of Business;
Summary description of form contents: Gives notice of certain plan
mergers, consolidations, spinoffs or transfers of assets or
liabilities from one plan to another. Each plan with a separate EIN
and plan number involved in merger or transfer of assets or
liabilities must file. For spinoffs, only plan in existence before
spinoff must file[F]; Form must be filed at least 30 days prior to a
merger, consolidation, spinoff, or transfers of plan assets or
liabilities to another plan.
Plan merger, etc;
Sending entity: Plan; (a plan that is terminated as a result of a
merger);
Receiving entity: DOL, IRS, and PBGC;
Form: Final Form 5500, Annual Return/Report of Employee Benefit Plan;
(including any applicable schedules); 26 U.S.C. § 6058(a); 29 U.S.C. §
1024;
Summary description of form contents: Indicates when all assets under
the plan have been distributed when "final return/report" box on the
form 5500 is checked. Indicates that all assets were distributed and
current value of assets at the date of distribution via schedule H
(for plans with 100 or more participants) and schedule I (plans with
less than 100 participants), Schedules H and I also provide the net
value of all assets transferred to and from the plan, including those
resulting from mergers and spinoffs.
Plan merger, etc;
Sending entity: Plan; (New Plan);
Receiving entity: Participant;
Form: Notification;
Summary description of form contents: Includes the new plan sponsor's
name and address.
Source: GAO analysis of laws and regulations. GAO-15-73.
[A] We use the term "cash out" to refer to a lump-sum distribution
made to an employee at job separation that is not subsequently rolled
over into a qualified employer plan or IRA.
[B] The Internal Revenue Code (IRC) requires that participants with an
eligible rollover distribution have the option to roll their
distributions into an IRA or another employer's tax-qualified plan in
the form of a direct rollover. 26 U.S.C. § 401(a)(31)(A).
[C] IRS regulations generally require plans to provide the notice no
less than 30 and no more than 90 days before the date of distribution.
26 C.F.R. § 1.402(f)-1, Q/A-2, Q/A-5) (2012). The Pension Protection
Act of 2006 (PPA) directed the regulations be changed to "no more than
180 days" (Pub. L. No. 109-280, § 1102(a)(1)(B), 120 Stat. 780, 1056)
but the rule IRS proposed (73 Fed. Reg. 59,575 (Oct. 9, 2008)), per
PPA, has not been finalized.
[D] IRS regulations generally require plans to also provide this
information to participants no less than 30 and no more than 90 days
before the date of distribution. PPA directed the regulations be
changed to "no more than 180 days" (Pub. L. No. 109-280, §
1102(a)(1)(B), 120 Stat. 780, 1056.), but the rule IRS proposed (73
Fed. Reg. 59,575 (Oct. 9, 2008)), per PPA, has not been finalized. The
same proposed rule modifies the regulations under section 411(a)(11)
of the IRC to provide that the description of a participant's right,
if any, to defer receipt of a distribution shall also describe the
consequences of failing to defer such receipt. (73 Fed. Reg. 59,576)
Additionally, under the proposed regulation plans would be required to
include in the information provided, among other things, statements
that: "some currently available investment options in the plan may not
be generally available on similar terms outside the plan and contact
information for obtaining additional information on the general
availability outside the plan of currently available investment
options in the plan," and "fees and expenses (including administrative
or investment-related fees) outside the plan may be different from
fees and expenses that apply to the participant's account and contact
information for obtaining information on such fees." 73 Fed. Reg.
[E] The Economic Growth and Tax Relief Reconciliation Act of 2001
added the notice provision and required the plan administrator notify
the distributee in writing (either separately or as part of the §
402(f) notice). Pub. L. No. 107-16, § 657, 115 Stat.38, 135 (codified
at 26 U.S.C. §§ 401(a)(31)(B) and 402(f)(1)(A)). In addition, to meet
the conditions of DOL's safe harbor and therefore, be deemed to have
satisfied their fiduciary duties with regard to mandatory
distributions, plans must provide participants with a summary plan
description, or a summary of material modifications, meeting certain
requirements. Specifically, it must describe the plan's forced-
transfer IRA provisions (including an explanation that the forced-
transfer IRA will be invested in an investment product designed to
preserve principal and provide a reasonable rate of return and
liquidity), a description of how fees and expense attendant to the
individual retirement plan will be allocated (i.e., the extent to
which expenses will be borne by the account holder alone or shared
with the distributing plan or plan sponsor), and the name, address and
phone number of a plan contact (to the extent not otherwise provided).
29 C.F.R. § 2550.404a-2.
[F] Exceptions: Form should not be filed for eligible rollover
distributions paid directly to an eligible retirement plan, or for
mergers, consolidations, or spinoffs meeting certain requirements (See
IRS instructions for Form 5310-A).
[End of table]
[End of section]
Appendix VII: Relevant Features of Pension Systems in the Six
Countries Selected for This Report:
This appendix provides additional details on the six countries we
studied and their approach to managing challenges posed by inactive
retirement accounts. In making our selection we considered countries
with extensive workplace retirement systems to include populations
that might face challenges similar to those of U.S. participants, and
considered the extent to which such countries had recent or innovative
approaches to address the challenges posed by inactive retirement
accounts. We determined that six countries could potentially provide
lessons for the United States. Information on each of the following
countries is included in this appendix.
Australia:
Belgium:
Denmark:
The Netherlands:
Switzerland:
The United Kingdom:
Australia:
At a glance:
Since 2005, individuals in Australia have been able to select a plan
(super) of their choosing to which employers they have throughout
their career will contribute. However, workers not actively choosing a
plan may accumulate accounts in multiple plans selected by their
employers. According to Australian Treasury officials, many
Australians lose track of their accounts, especially when they change
jobs, names, and addresses. Small balances may be eaten away by fees,
necessitating forced-transfers to preserve their value.
Forced transfers:
Since 2012, all small lost accounts under AUS $2,000 are transferred
to the ATO where they become part of consolidated revenues but are
credited a return equal to inflation to preserve value, when claimed.
ATO officials said they plan to increase the small lost account
threshold to $4,000 in 2015 and $6,000 in 2016. ATO officials noted
that this policy is in place because the ATO has the capability to
find people and match them with lost accounts through updated tax data
and can prevent lost accounts from being reduced by fees. Lost
accounts are transferred to the ATO when they meet certain criteria,
but the most common reasons, in addition to a balance below AUS
$2,000, is when the missing participant turns 65, according to
Australian government officials.
Pension Registry:
The Australian Tax Office (ATO) has established an online tool called
SuperSeeker that individuals can use to find lost retirement accounts,
via the governmental portal myGov. A smart phone application is also
available for accessing the information.
Figure 13: Screenshot of the Australian Tax Office (ATO) mobile phone
application:
[Refer to PDF for image: screenshot]
The ATO helps participants use a mobile phone to find any retirement
accounts they may have lost.
Source: The ATO Website. GAO-15-73.
[End of figure]
Information provided to participants can be used for retirement
planning purposes, including consolidation, in order to improve
participant retirement security. However, The SuperSeeker does not
perform analytical tasks, such as showing retirement outcomes under
various scenarios, according to government officials we interviewed.
Participants who find lost accounts upon searching for them are able
to consolidate them online in a plan of their choice generally within
3 working days. The SuperSeeker now allows paperless “point and click”
consolidation. according to ATO officials. According to ATO, nearly
155,000 accounts were consolidated in 2013-14 with a total value of
about AUD $765 million. In addition, the number of lost accounts went
down by 30% between June 2013 and June 2014.
The pension registry is primarily financed through a tax on the
superannuation sector, and in some cases such as funding the letter
campaign to raise awareness, from general revenue. The tax has
fluctuated between AUS $2.4 million in 2002 and AUS $7.3 million in
2011, according to the ATO.
[End of Australia fact sheet]
Belgium:
At a glance:
Officials told us participants changing jobs can leave their pension
account behind or roll it over (1) to the plan of the new employer,
(2) to a “welcome-structure” for outgoing workers often taking the
form of a group insurance, or (3) to a qualified individual insurance
contract. Sectoral industry plans, negotiated in collective bargaining
agreements, allow participants who change jobs but stay in the same
industry to keep one retirement account, according to officials. With
defined benefit plans, vested benefits in dormant accounts are frozen
(i.e. not subject to further cost of living or wage increases)
officials told us, whereas with defined contribution plans, separated
participants' dormant accounts receive the same return as active
accounts but the minimum return obligation that the plan sponsor must
meet, currently set at 3.25% of account balances per year, is frozen.
Forced transfers:
There are no forced-transfers in Belgium, officials said. When an
individual separates from a plan, his or her account is kept dormant
in the plan by default, according to Belgian officials; plans are
required to accept transfers of inactive accounts if a participant
requests it but these are kept separately from the active account.
Pension Registry:
The pension registry in Belgium has two components, according to
officials: a database of national pensions (similar to Social
Security) and one covering workplace retirement accounts, which
includes both active and inactive accounts. The pension registry does
not have information on personal retirement savings. Since the
enactment of legislation in 2006, the Belgian government has been
collecting data on workplace accounts for private sector participants
and the self-employed, according to officials. The pension registry
extracts some information from existing databases (such as the
registry of individuals and employers), and data from service
providers, officials said. The registry stores some of the information
in its database.
Figure 14: Screenshot from Belgium Pension Registry:
[Refer to PDF for image: screenshot]
The Belgium pension register (available only in French) provides
consolidated online retirement account information. This screen shot
shows a participant with two plans who, as of 12/04/2012, had a total
of €1,644.07 in one account and €640.00 in the other. The document
also provides spend-down options for each plan, including life
annuities, lump-sum and term annuities.
Source: Sigedis. GAO-15-73.
[End of figure]
From 2016, the new pension registry will take over the provision of
information on inactive accounts, as indicated in the law adopted in
May 2014, according to Belgian officials, and workers with inactive
accounts will no longer receive statements from plan sponsors or
pension institutions but will be able to consult the registry online.
Officials also told us the registry will help the government gather up-
to-date information on retirement plans. The government finances the
pension registry from general revenue, officials said. Once fully
functional, the annual cost of running the registry will be around 3.5
million Euros, according to Belgian pension registry officials we
interviewed.
[End of Belgium factsheet]
Denmark:
At a glance:
Multi-employer industry plans (one plan covers all workers in an
industry) allow participants who change jobs but stay in the same
industry to use just one retirement account. When individuals change
industries, the account remains inactive in the plan, unless the
participant takes action to roll it in to the new industry plan,
according to Danish officials. Plans sign agreements requiring them to
accept transfers requested by participants.
Danish officials said small inactive accounts are sometimes reduced
and eliminated by fees.
If participants never take action to consolidate accounts, plans will
eventually use a participant's designated “easy access” bank account
to make distribution payments at the participant's retirement age,
according to Danish officials.
Forced transfers:
There is not yet a forced-transfer mechanism that consolidates
inactive accounts. However, the government is considering one for
small accounts to prevent them from being reduced by fees, according
to Danish officials.
Pension Registry:
The Danish Insurance Association's pension registry called
PensionsInfo collects and consolidates retirement savings information
from plans and insurers when a participant logs-in, according to
materials provided by Danish Insurance Association representatives we
interviewed. It stores only the government-issued identification
numbers of participants in each plan.
Figure 15: PensionsInfo Screenshot Showing Lump Sums Available at
Various Retirement Ages:
[Refer to PDF for image: screenshot]
PensionsInfo, the Danish pension register, provides current online
retirement account information. The left column ("Din pension" means
"your pension') shows retirement amounts starting at age 60 and
continuing through age 67. The column on the right shows the
corresponding lump sum payment (or "Engangsudbetaling') the user is
entitled to for each retirement age. In this example, the participant
retiring at age 60 would be entitled to a lump sum of 52.000 kr., or
about $9,000.
Source: PensionsInfo website (www.pensionsinfo.dk). GAO-15-73.
[End of figure]
Individuals can view contact information for each plan or insurer,
which they can use to consolidate accounts. It is voluntary for
providers to allow access to their records, but virtually all do,
including government authorities who provide information on national
(Social-Security-like) retirement benefits. PensionsInfo provides
current account balances and projected future distribution amounts for
public, workplace and private retirement benefits under various
scenarios, for example, comparing lump-sum withdrawals, phased
withdrawals and whole life annuities at different retirement ages.
Inactive accounts can be flagged for participants in a pop-up window
recommending consolidation, according to officials at the Danish
Insurance Association. Participants can print or save the consolidated
account information for their records, share it with a personal
financial advisor, or use it in conjunction with retirement planning
software designed to work with it. Insurers and plans voluntarily pay
for the pension registry. The fee paid by each is calculated on the
basis of the number of participants requesting to view data from them.
Recent data from the European Actuarial Consultative Group indicate
that the number of unique visitors to the registry has increased from
512,218 in 2010 to 742,426 in 2011 to reach 1,132,488 in 2012. The
annual cost of maintaining the pension registry is estimated at 1.5
million euros.
[End of Denmark factsheet]
The Netherlands:
At a glance:
Multi-employer industry plans, in which a single plan generally covers
employees in one industry, allow participants who change jobs but stay
in the same industry to keep one pension account. According to an
Organization for Economic Co-operation and Development Working Paper,
about three quarters of workers belong to industry wide multi-employer
plans.
Participants changing jobs can leave their retirement account behind
or roll it over to the plan of the new employer, according to Dutch
officials, although in recent years, the transfer of many defined
benefit pensions has been frozen due to underfunding in those plans.
Participants receive an annual Uniform Pension Statement (UPS) from
the pension provider of the current employer. The standardized layout
of the UPSs made it easier to provide uniform consolidated online
information.
Forced transfers:
Officials told us there are no forced-transfers in the Netherlands.
Rather, accounts that participants changing jobs do not transfer to a
new plan stay in their old plan, but the annual indexation of benefits
differ: inactive accounts are indexed to price inflation, whereas
active accounts are indexed to wage inflation.
Pension Registry:
The Netherlands launched the online pension registry in January 2011.
The decision to establish the registry was part of the 2006 Pension
Act.
Figure 16: Security Levels for the National Digital Signature:
[Refer to PDF for image: screenshot]
The digital signature in the Netherlands provides a way for citizens
to securely access the pension register and other government agencies.
The level of identity authentication required depends upon the
information an individual is attempting to access and may include a
username and password, responding to a text message, or, in the
future, using an identity card with an electronic chip.
Levels of security:
Security levels: Basic;
Login method: Username and password.
Security levels: Medium;
Login method: Username, password and SMS code.
Security levels: High;
Login method: Pass with chip (not yet available).
Source: The Netherland's DigiD website (https://www.digid.nl/en/). GAO-
15-73.
[End of figure]
Participant can see up-to-date pension information on active and also
inactive accounts associated with previous employers, including
account balances, account numbers and plan contact information. Active
account information has to be mailed to participants on an annual
basis and inactive account information every 5 years, according to
Dutch officials. Recent data from the European Actuarial Consultative
Group shows that the number of unique visitors to the registry was
1,500,000 in 2011 and 1,100,000 in 2012.
Pension providers, not the government, finance the pension registry at
an annual cost of 2.3 million euros or .49 euro per active
participant. Officials also said the cost of developing the pension
registry was split between the pension fund industry and the insurance
schemes industry, based on their share of the workplace retirement
plan market. It took about 3 years and cost about 10 million euros to
develop the new pension registry, according to Dutch government
officials we interviewed.
[End of The Netherlands factsheet]
Switzerland:
At a glance:
The Swiss system is an example of how a retirement account can follow
a participant as they move from job to job. Participants are required
to transfer inactive workplace retirement accounts left with previous
employers, according to Swiss government officials we interviewed.
There are a variety of defined benefit and defined contribution plan
types in Switzerland. As accounts move from plan to plan, conversion
rules established in law govern the value of transferred assets.
Forced transfers:
The assets of inactive accounts in workplace plans are transferred to
the Substitute Plan, which is a foundation, according to a Swiss
insurer insuring 40 percent of the companies in Switzerland. There,
they remain invested until the participant reaches retirement age or
transfers the account to their active plan or vested benefits account,
according to Swiss officials. At retirement age, officials at the
institution providing plans insolvency insurance, the Guarantee Fund,
contact participants and inform them of their forcibly-transferred
account. The address these officials use is the address where
participants receive their government (Social Security equivalent)
retirement benefits. While plans must hold onto inactive accounts for
at least 6 months after contributions have stopped, after 2 years,
they must transfer them.
Pension Registry:
There is no pension registry providing consolidated current online
workplace retirement account information in Switzerland, according to
Swiss government officials. Swiss Officials said when participants
need information on a workplace retirement account started at a past
employer, they refer to information provided by the employer or plan
or contact the Guarantee Fund, which provides insolvency insurance to
plans in Switzerland. Participants can contact officials at the
Guarantee Fund by phone or e-mail to identify accounts that were
forced out of their plan because they were inactive, according to
Swiss officials and the Guarantee Fund's 2013 annual report.
Figure 17: A Portion of a Swiss Form for Participants with Lost
Accounts:
[Refer to PDF for image: illustration]
In Switzerland, participants who have lost track of an account in a
I retirement plan of a past employer can request information on it
from a national-level agency.
Enquiry to the 2nd Pillar Central Office about balances of an
occupational benefit plan:
Please note the details given on the information sheet before
completing this questionnaire. Only one questionnaire per person is to
be submitted.
If you submit this form in the name of someone else, please enclose a
procuration. Thank you in advance.
1.1. Personal data of person searching for 2nd Pillar benefits:
1.1 Name:
First name:
Date of birth:
AHV/AVS-No:
Source: Swiss 2nd Pillar Central Office Website. GAO-15-73.
Note: In Switzerland, participants who have lost track of an account
in a retirement plan of a past employer can request information on it
from a Swiss agency.
[End of figure]
Swiss officials said participants can use information on their
inactive accounts to roll them over to the plan of their new employer.
They said participants are required by Swiss law to transfer their
retirement account when they change jobs, and because enrollment is
generally mandatory, officials said employers will often help
employees roll their money from their old plan to their new plan.
Individuals without a new plan are required to purchase a vested
benefit account at a bank or insurance company.
[End of Switzerland factsheet]
The United Kingdom:
At a glance:
Parliament of the United Kingdom adopted The Pensions Act 2014 which
will transfer small inactive workplace retirement accounts to an
individual's active plan. Before the legislation, plans had ultimate
discretion over whether or not to accept a transfer, according to a
U.K. government report, and the onus for pursuing a transfer rested on
individuals. Regulations will now be made to automatically transfer
workplace retirement benefits, according to a U.K. official,
preventing a plan from declining to accept such transfers. That
process generally applies to defined contribution plans most U.K.
participants are automatically enrolled in. Before the Pensions Act
2014, small, inactive retirement accounts were being reduced by fees
and managed separately, and in an inefficient manner.
Forced transfers:
Once the Pensions Act 2014 is fully implemented, according to reports
from the U.K. government, inactive 401(k)-type retirement accounts
under £10,000 will be transferred into an account the employee
actively contributes to by default if the employee does not opt out of
the process. The legislation allows for the creation of a database to
keep track transferrable accounts for that purpose.
Pension Registry:
There is no pension registry in the United Kingdom providing direct
access to consolidated retirement account information online,
according to U.K. government officials. Individuals get information on
lost accounts through a government service called the Pensions Tracing
Service. Participants use the service to trace lost workplace or
private retirement account based on information the participant
supplies. The Pensions Tracing Service requests information from
participants on their workplace or personal pension plan, such as
names, addresses, dates of employment or participation in the plan,
job title, and industry.
Figure 18: Screenshot of a Pension Tracing Service Form:
[Refer to PDF for image: screenshot]
The United Kingdom government's Pension Tracing Service helps
participants who have lost track of a retirement account find contact
information for their plan.
Source: Pension Tracing Service Website. GAO-15-73.
[End of figure]
Individuals use the contact information of the plan administrator to
determine their eligibility for retirement benefits, and if eligible,
to claim them, according to a U.K. government research report. If the
trace is successful, the Pensions Tracing Service provides the current
name or contact details of the plan administrator to the individual.
Participants can access the Pensions Tracing Service online, or by
phone or mail.
The Pensions Tracing Service is a free service available to the
general public in the United Kingdom provided by the U.K. Department
for Work and Pensions.
[End of The United Kingdom factsheet]
[End of section]
Appendix VIII: Comments from the U.S. Department of Labor:
U.S. Department of Labor:
Assistant Secretary for Employee Benefits Security Administration:
Washington, D.C. 20210:
November 5 2014:
Charles A. Jeszeck:
Director, Education, Workforce, and Income Security:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Jeszeck:
Thank you for the opportunity to review the Government Accountability
Office's (GAO) draft report entitled "Greater Protections Needed for
Forced Transfer and Inactive Accounts." We share your concerns
regarding participants who fail to make decisions regarding benefit
distributions and may have lost investment opportunities that would
help them with their retirement security.
Plan participants who change employers face important decisions
affecting their retirement security. When participants fail to provide
distribution instructions to plans that provide for mandatory
distributions of certain vested benefits, section 401 (a)(31) of the
Internal Revenue Code, as amended by the Economic Growth and Tax
Relief Reconciliation Act of2001 (EGTRRA), requires that such a
distribution be directly transferred into an individual retirement
plan (IRA). Congress, in EGTRRA section 657(c)(2)(A), also directed
the Department of Labor to prescribe regulations providing safe
harbors under which the plan administrator's designation of an
institution to receive the funds and the initial investment choice for
the forced-transfer funds are deemed to satisfy the fiduciary duties
under ERISA. In 2004, the Department created a regulatory safe harbor
for transfers to individual retirement plans pertaining to the
selection of the IRA provider and the initial investment of
transferred funds . The principal conditions of the regulation relate
to the amount of distributions, the qualifications of retirement plan
providers, permissible investment products, limits on fees and
expenses, disclosure of information to participants and prohibited
transactions. This regulation, we believe, is consistent with
Congress' concerns about preserving principal for retirement purposes
as evidenced by section 657(c)(2)(B) of EGTRRA, which calls for
consideration of individual retirement plans "that promote the
preservation of assets for retirement income purposes." The GAO found
that, because fees have outpaced returns in most of the safe-harbor
IRAs it examined, the account balances tend to decrease over time. The
Employee Benefits Security Administration (EBSA) has a long history of
trying to help plan fiduciaries with missing participant problems and
with attempting to preserve the retirement funds of those
participants. EBSA has made efforts to reunite former participants
with their retirement savings from both ongoing and terminated plans.
In line with these efforts, EBSA recently published guidance in Field
Assistance Bulletin 2014-01 (FAB 2014-01) on missing participants in
terminated defined contribution plans. The FAB encourages plans to use
more modern electronic search tools for reuniting missing participants
with their retirement savings.
EBSA is also studying the recommendations contained in the November
2013 report of the ERISA Advisory Council regarding industry best
practices concerning lost participants. EBSA currently maintains many
publications that provide workers information on what they should do
if they leave their current employers, and what to do if an employer
goes bankrupt.[Footnote 1] EBSA also posted a factsheet on its website
"FAQs About Social Security Administration (SSA) Potential
Private Benefit Information Notice." The factsheet explains to
participants why they received a notice from SSA reminding them about
private employer retirement benefits that they have earned when they
file a claim for benefits.[Footnote 2] Under the Department's
Abandoned Plan Program, which facilitates the termination of, and
distribution of benefits from, individual account pension plans that
have been abandoned by their sponsoring employers, participants and
others can use a search tool on the Department's web site to find out
whether a plan is in the process of being, or has been, terminated and
the name of the Qualified Termination Administrator winding-up the
plan under the Program.[Footnote 3]
With respect to your specific recommendations for executive action at
this time, however, we submit the following:
Expand the Investment Alternatives Available Under the Safe Harbor:
The Department disagrees with the draft report's first recommendation.
Specifically, the draft report called for the Department of Labor to
expand the regulatory safe harbor to include the "qualified default
investment alternatives" (QDIAs) among the investment alternative
available to plan sponsors in forced transfers. The QDIA regulation
provides relief to plan fiduciaries who select investment alternatives
for participants who fail to direct the investment of their own plan
accounts.[Footnote 4]
Consistent with Congress's intent to preserve retirement assets for
participants with small account balances, the Department limited the
investment alternatives available pursuant to its safe harbor
regulation to investments that are designed to minimize risk and
maintain liquidity. At the time the regulation was published, some
public commenters similarly argued that more balanced or diversified
investments should be permitted because they would help retirement
savings grow over time.[Footnote 5] However, in responding to the
comments, the Department believed that these investments were not
necessarily appropriate in the context of an automatic rollover,
particularly because of the absent participant and the relatively
small account balances typically covered by the safe harbor. We
appreciate your concern about the fees that may be charged to
these accounts, but fees are not unique to capital preservation
vehicles. Under the safe-harbor regulation, the plan's fiduciary is
responsible, at the time an account is rolled over, to ensure that
fees and expenses will not exceed those charged by the IRA provider
for comparable nonrollover IRAs.
Further, we believe the performance information that GAO uses to
illustrate the impact of fees on forced-transfers covers too short a
period. During much of this time, the returns on capital preservation
vehicles were unusually low, reflecting the Federal Reserve Board's
policy to keep interest rates low. Use of longer term data may show
that capital preservation vehicles generally earn returns commensurate
with their purpose. Further, as opposed to an automatic rollover
IRA, the participant in a QDIA investment will be receiving account
statements as to the performance of and effect of fees on his or her
account. Participant contributions to a QDIA generally continue to be
made into the accounts of participants whose accounts are invested in a
QDIA account and may increase over time. A plan fiduciary, subject to
ERISA's fiduciary responsibilities, will continue to monitor the
management and performance of a QDIA to ensure, for example, that its
associated fees are reasonable and that the investments of the QDIA are
appropriate. In this context, the Department determined that the
greater variability associated with QDIAs was an acceptable trade-off
for higher potential returns. Accordingly, the categories of
investments permitted as QDIAs must include a mix of fixed income and
equity exposures designed to provide varying degrees of long-term
appreciation and capital preservation.[Footnote 6]
A participant in an automatic rollover (forced transfer) IRA situation
is dramatically different. Such individuals are not in a position to
monitor their accounts, and there is no fiduciary who will monitor
their accounts for them. For these reasons, the Department continues
to believe that the goal of preservation is appropriate in forced-
transfer IRAs, to better ensure the stability and liquidity of the
account (when or if) it is claimed by its owner, who may then direct its
investment as appropriate.
DOL Task Force to Consider a National Registry:
The Department will evaluate the possibility of convening a task force
and initiating a dialogue among the various stakeholders regarding the
need to establish an online national pension registry and the
parameters of the registry. We share GAO's concerns as to the
persistence of missing participant issues across all types of pension
plans and the need for a comprehensive solution to the problems faced
by both missing and unresponsive participants. However, we do not
believe we have the authority to establish such a registry and provide
sufficient funding. For such a database to be useful there would also
be a need for (1) a mandate requiring the reporting of the information
to the agency maintaining the registry, and (2) authority to arrange
for the consolidation of retirement account information that is
currently spread across more than one agency.
Moreover, for participants in terminated plans, some of these issues
may be addressed by expansion of the Pension Benefit Guaranty
Corporation (PBGC's missing participant program. As you know, the PBGC
recently published a Request for Information (RFI) seeking public
comments about implementing a new program pursuant to section 4050 of
ERISA, as amended by the Pension Protection Act of 2006, to deal with
benefits of missing participants in terminating individual account
plans. Including defined contribution assets in PBGC's online
searchable database, which is currently available for transferred
defined benefit assets, could make it useful to many more individuals.
This PBGC listing contains names and last-known addresses, companies
where missing people earned their pensions, and the dates their pension
plans ended. It is premature to speculate on results because as of
this date a proposed regulation has not been issued.
In conclusion, we appreciate GAO's interest in helping participants
with their retirement savings as they transition from one job to the
next during their employment years and re-uniting them with their hard-
earned savings as they face their retirement years. EBSA is committed to
protecting the retirement benefits of workers, retirees, and their
families. We appreciate the 0ppOliunity to review and comment on the
draft report. Please do not hesitate to contact us if you have
questions concerning this response or if we can be of further
assistance.
Sincerely,
Signed by:
Phyllis C. Borzi:
Assistant Secretary:
Footnotes:
[1] [hyperlink, http://www.dol.gov/ebsa/publications/wyskapr.html].
[2] [hyperlink,
http://www.dol.gov/ebsa/SSAPotentiaIPrivateRetirement/SSAPotentiaIPrivat
eRetirement.html].
[3] [hyperlink, http://askebsa.dol.gov/AbandonedPlanSearch/].
[4] 29 C.F.R. § 2550.404c-5.
[5] See 69 FR 58018, at 58021 (Sept. 28, 2004).
[6] 29 C.F.R § 2550.404c-5(e)(4).
[End of section]
Appendix IX: Comments from the Social Security Administration:
Social Security:
Social Security Administration:
Office of the Commissioner:
Baltimore, MD 21235-0001:
November 6, 2014:
Mr. Charles A. Jeszeck:
Director, Education, Workforce, and Income Security Issues:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Jeszeck:
Thank you for the opportunity to review the draft report, "401(K)
PLANS: Greater Protections Needed for Forced Transfers and Inactive
Accounts" (GAO-l5-73). We have enclosed our response to the audit
report contents.
If you have any questions, please contact me at (410) 966-9014. Your
staff may contact Gary S. Hatcher, our Senior Advisor for Records
Management and Audit Liaison Staff, at (410) 965-0680.
Sincerely,
Signed by:
Katherine Thornton:
Deputy Chief of Staff:
Enclosure:
Comments On The Government Accountability Office Draft Report, "401(k)
Plans: Greater Protections Needed For Forced Transfers And Inactive
Accounts" GAO-15-73:
General Comment:
We appreciate the Government Accountability Office's (GAO) study on
401 (k) plans and its desire to help individuals access information
about their retirement accounts. Social Security benefits playa very
important role in the financial security of the public, and we strive
every day to ensure that we provide accurate, objective, easy to
understand information about Social Security benefits, thereby helping
to ensure that the public understands the benefits available to them,
and can make educated decisions about when to apply for those benefits.
Recommendation:
To ensure that 401(k) plan participants have timely and adequate
information to keep track of all their work place retirement accounts,
we recommend that the Social Security Administration's Acting
Commissioner make information on potential vested plan benefits more
accessible to individuals before retirement. For example, the agency
could consolidate information on potential vested benefits, currently
sent in the Potential Private Pension Benefits Information notice,
with the information provided in the Social Security earnings and
benefit statement.
Response:
We disagree. As required by the Social Security Act, we disclose the
Internal Revenue Service's pension information automatically upon an
individual applying for certain benefits or upon an individual making
a specific request for the information. We will seek legal guidance to
determine if it is permissible to include a general statement
encouraging potential beneficiaries to pursue any external pension
benefits in our benefit Statement. Even if we can provide information
on potential vested benefits, including unverified, external third-
party retirement income information in our Social Security Statement
or in an individual's personal my Social Security account, as GAO
suggests, may place SSA in a position of responding to questions
about Employment Retirement Income Security Act (ERISA) policy from
the public. The ERISA notice directs the recipient to contact U.S.
Department of Labor's Employee Benefits Security Administration. SSA
cannot respond to recipients' ERISA inquires because we have no
firsthand knowledge of the private pension information involved. This
is outside the scope of our mission, and it would increase workloads,
including additional written correspondence and undeliverable mail. In
addition, there is no interface between potential private retirement
information and Social Security benefits. Requiring SSA to provide
information on potential entitlement to private retirement funds could
create the belief that private retirement and Social Security benefits
are somehow connected. Furthermore, we may not have authority to expend
appropriated funds to complete this work or disclose the requested
information.
[End of section]
Appendix X: GAO Contact and Staff Acknowledgments:
GAO Contact:
Charles Jeszeck, (202) 512-7215 or jeszeckc@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Tamara Cross (Assistant
Director), Mindy Bowman and Angie Jacobs (Analysts-in-Charge), Ted
Leslie, Najeema Washington, and Seyda Wentworth made key contributions
to this report. James Bennett, Jennifer Gregory, Kathy Leslie, Frank
Todisco, Walter Vance, Kathleen van Gelder, and Craig Winslow also
provided support.
[End of section]
Related GAO Products:
Private Pensions: Clarity of Required Reports and Disclosures Could Be
Improved. [hyperlink, http://www.gao.gov/products/GAO-14-92].
Washington, D.C., November 21, 2013.
401(k) Plans: Labor and IRS Could Improve the Rollover Process for
Participants. [hyperlink, http://www.gao.gov/products/GAO-13-30].
Washington, D.C.: March 7, 2013.
Social Security Statements: Observations on SSA's Plans for the Social
Security Statement. [hyperlink,
http://www.gao.gov/products/GAO-11-787T]. Washington, D.C., July 8,
2011.
Defined Contribution Plans: Key Information on Target Date Funds as
Default Investments Should Be Provided to Plan Sponsors and
Participants. [hyperlink, http://www.gao.gov/products/GAO-11-118].
Washington, D.C.: January 31, 2011.
Individual Retirement Accounts: Government Actions Could Encourage
More Employers to Offer IRAs to Employees. [hyperlink,
http://www.gao.gov/products/GAO-08-590]. Washington, D.C.: June 4,
2008.
[End of section]
Footnotes:
[1] In 2013, 38 percent of workers left their jobs. The average of the
previous 5 years, 2008 to 2012, was a similar 38.4 percent. U.S.
Bureau of Labor Statistics, Job Openings and Labor Turnover Survey,
table 16.
[2] In this report, the term "plan" is used to mean a plan or plan
sponsor under the Employee Retirement Income Security Act of 1974
(ERISA). Pub. L. No. 93-406, 88 Stat.829 (codified as amended at 29
U.S.C. §§ 1001-1461). Under ERISA, plans are sponsored by employers or
employee organizations or jointly by both. Other countries use the
terms "scheme" and "fund" in reference to workplace retirement
benefits. We use the term plan when discussing workplace benefit
provisions abroad and in the United States and when referring to
particular responsibilities that may technically fall to the plan
sponsor or plan administrator.
[3] In this report, the term "savings" is used to mean the assets or
funds in an individual's workplace retirement plan account and may
include employee contributions, employer contributions, amounts
attributable to rollovers from another plan or an IRA, and investment
returns on any of these funds.
[4] In this report, the term "separated participant" includes those
who left their job voluntarily or otherwise, retirees, and
participants who kept their jobs but whose employer was bought out by
another company.
[5] 26 U.S.C. §§ 401(a)(31) and 411(a)(11).
[6] Federal statute refers to this process as "mandatory
distribution." 26 U.S.C. § 401(a)(31)(B). For this report, however, in
the U.S. context, the term "forced transfer" is used. In an
international context, the term "forced transfer" is used more broadly
to mean the transfer of a participant's assets out of a retirement
plan without their consent.
[7] Applicable Department of Labor (DOL) regulations use the term
"automatic rollover" in connection with the use of these IRAs. 29
C.F.R. § 2550.404a-2(a). Those regulations also permit plans to
purchase annuities for individuals forced out of plans, but our review
did not include that option. In addition, IRA providers we interviewed
did not indicate that annuities are used by plans seeking a
destination for forced transfers.
[8] Federal statute permits plans to rollover accounts of more than
$1,000 but not over $5,000 to an IRA on behalf of participants who
have not instructed, for example, to have them rolled over to a new
employer's plan or a pre-existing IRA, or sent directly to them. 26
U.S.C. § 401(a)(31)(B).
[9] In this report we use the term 'inactive' to refer to a retirement
account where the account holder, a participant in a 401(k) plan, has
changed jobs and is no longer making contributions. The account holder
in such cases may or may not be 'missing' or otherwise not providing
instruction, when requested, to the plan.
[10] In 2013, the Advisory Council on Employee Welfare and Pension
Benefit Plans, also known as the ERISA Advisory Council, held 2 days
of public hearings on June 4, 2013 and August 28, 2013 to hear
testimony about "Lost Participant" issues from a number of
constituencies. See Advisory Council on Employee Welfare and Pension
Benefit Plans, Locating Missing and Lost Participants, (Washington,
D.C.: November 2013).
[11] Pub. L. No. 107-16, 115 Stat. 38.
[12] § 657(a), 115 Stat. 135-36 (codified at 26 U.S.C. §
401(a)(31)(B)).This provision effectively codified a previous IRS
ruling that a plan could make a direct rollover to an individual
retirement plan (which is an IRA or an annuity) its default option for
involuntary distributions, without jeopardizing its tax-qualified
status, when a participant has a balance greater than $1,000 but not
in excess of $5,000 and makes no election. Rev. Rul. 2000-36, 2000-2
C.B. 140. We reviewed only the use of forced-transfer IRAs in this
report. EGTRRA also provided that plan amounts may be determined for
such purposes without regard to any portion of a participant's account
attributable to rollovers and their earnings. § 648, 115 Stat. 127
(codified at 26 U.S.C. § 411(a)(11)(D)).
[13] 26 U.S.C. § 411(a)(11).
[14] Pub. L. No. 107-16, § 657(c)(2)(A), 115 Stat. 38, 136.
[15] Fiduciary Responsibility Under the Employee Retirement Income
Security Act of 1974 Automatic Rollover Safe Harbor, 69 Fed. Reg.
58,018 (Sept. 28, 2004) (codified at 29 C.F.R. § 2550.404a-2).
[16] The safe harbor ensures that both (1) a plan administrator's
designation of an institution to receive the forced-transfer, and (2)
the initial investment choice for the rolled-over funds will be deemed
to satisfy ERISA's fiduciary standard of care at 29 U.S.C. § 1104(a).
In addition, a financial institution may designate itself or an
affiliate to receive the forced-transfers from its own plan, and
select a proprietary initial investment for the funds, under the terms
of a prohibited transaction exemption developed in conjunction with
the safe harbor. 29 U.S.C. § 1106 and Class Exemption for the
Establishment, Investment and Maintenance of Certain Individual
Retirement Plans Pursuant to a Mandatory Distribution, 69 Fed. Reg.
57,964 (Sept. 28, 2004).
[17] If a participant's account is $1,000 or less, a plan can complete
a forced transfer by paying the account balance directly to the
participant, which is a taxable event. The plan would withhold 20
percent of the balance for possible tax liability. An additional 10
percent tax may apply if the individual is under age 59 ½ at the time
of the distribution. 26 U.S.C. § 72(t).
[18] Plan Sponsor Council of America's (PSCA) 55TH Annual Survey of
Profit Sharing and 401(k) Plans. Another 42 percent simply cash out
balances less than $1,000 and let larger balances remain in the plan,
while just 7 percent allow balances of any size to remain in the plan
after a participant separates. The survey collects data on the 2011
plan experience from 840 plans with more than 10 million participants
and more than $750 billion in plan assets. PSCA surveys both profit
sharing plans and 401(k) plans. Some of the data we use from this
report are for only 401(k) plans, but other data are for both kinds of
plans combined. Given that just 2 percent of plans surveyed are profit
sharing plans, we determined the data are sufficiently representative
of the 401(k) plan experience. There are no comprehensive federal or
private industry data on the number of forced-transfer IRAs created or
the amount of employer-based retirement savings transferred into them.
[19] SSA analysis of Form 8955-SSA data, which are collected by IRS
and then transmitted to SSA. SSA data include benefits left behind by
separating participants in all defined contribution plans, including
401(k) plans, as well as in defined benefit plans, which are not
subject to forced transfers under 26 U.S.C. § 401(a)(31)(B). GAO
assessed the reliability of the data and found that it met our
standards for our purposes.
[20] While forced-transfer IRA providers could invest money in assets
other than money market funds, certificates of deposit, or savings
accounts, such investments would not meet DOL's current requirements
for the safe harbor.
[21] 29 C.F.R. § 2550.404a-2(c)(3)(ii).
[22] 29 C.F.R. § 2550.404a-2(c)(3).
[23] Data are from Morningstar.com.
[24] When we refer to returns, we mean the fund return net of fund
investment expenses. We found that the fund return is generally
equivalent to the return for the account because all but one IRA
provider we interviewed use only one default investment per account.
When we refer to fees, we mean additional fees charged by the provider
generally expressed as dollar amounts.
[25] This reflects one provider's policy of charging a 20 percent
opening fee for a "premium" forced-transfer IRA account, which must
have a balance of at least $500.
[26] Administrative fees paid on a forced-transfer IRA include account
opening fees, address search fees for a missing account holder, and
annual administrative fees. An account holder might also pay
transaction fees and account closure fees if they decide to reinvest
or transfer the savings in their forced-transfer IRA.
[27] We used a $1,000 starting balance to simplify the observation of
the effect. While most balances declined over time, two gained
slightly in value and one had no change in value--after an initial
decrease due to the account opening fee--because fees are capped at
the value of the investment returns.
[28] This projection reflects one forced-transfer IRA's $50 account
set-up fee, a recurring $50 annual fee, and a recurring $65 annual
address search fee, with a 0.11 percent investment return. The same
provider uses three other default investments, which would also
contribute to the balance decreasing to $0 in 9 years. See appendix
III for all forced-transfer IRA combinations that we analyzed.
[29] This reflects adding the annual decrease on a $1,000 balance (7.3
percent) attributable to the median account opening fee of $6.75 and
the median annual fee of $42 and the average annual inflation rate
over 20 years from 1993 to 2013 (2.45 percent), according to the U.S.
Bureau of Labor Statistics' Consumer Price Index for All Urban
Consumers (CPI-U).
[30] Target date funds are designed to be long-term investments for
individuals with particular retirement dates in mind. For more
information on target date funds, see GAO, Defined Contribution Plans:
Key Information on Target Date Funds as Default Investments Should Be
Provided to Plan Sponsors and Participants, [hyperlink,
http://www.gao.gov/products/GAO-11-118] (Washington, D.C.: Jan. 31,
2011).
[31] Morningstar.com, Morningstar Fund Research Target-Date Series
Research Paper: Survey 2013, p.20. The paper reports that "from the
pre-crisis peak in 2007 through the end of 2012, all but one of the
currently extant 2015 funds have recouped their losses, and most have
produced double digit positive gains."
[32] The mean total return for taxable money market fund investments
over 10 years ending July 31, 2014 was 1.45 percent, whereas the
geometric mean of 10-year returns for all target date funds was 6.3
percent, according to our analysis of data from Morningstar.com. Money
market funds, such as those commonly used in forced-transfer IRAs,
have not always underperformed target date funds common to 401(k)
plans. In 2008, during the last recession, 2010 target date funds had
a negative total net return in the double digits while money market
funds overall earned a return of 2.05 percent. Still, equities-based
funds like target date funds are designed to perform well over the
long run.
[33] DOL's qualified default investment alternative regulation
provides relief to plan fiduciaries who comply with notice and other
requirements when investing on behalf of plan participants who fail to
direct their own investments. 29 C.F.R. § 2550.404c-5. It includes
three categories of investments that may be eligible as qualified
default investment alternatives--target date or similar funds,
balanced funds, and managed accounts.
[34] 26 U.S.C. §§ 401(a)(31)(B)(i) and 7701(a)(37). We reviewed only
the use of forced-transfer IRAs in this report, and providers we
interviewed did not indicate that individual retirement annuities are
used by plans seeking a destination for forced transfers.
[35] The specific investment products held in IRAs and 401(k) plans,
as well as the various financial professionals that service them, are
subject to oversight from applicable securities, banking, or insurance
regulators, which can include both federal and state regulators.
[36] Generally, DOL has interpretive jurisdiction over prohibited
transactions and IRS has certain enforcement authority. See GAO,
Individual Retirement Accounts: Government Actions Could Encourage
More Employers to Offer IRAs to Employees, [hyperlink,
http://www.gao.gov/products/GAO-08-590] (Washington, D.C.: June 4,
2008).
[37] 26 U.S.C. § 4975 and 29 U.S.C. § 1108. Terminating plans force
out both current and separated participants' balances to dispose of
all plan assets, as required to complete a plan termination.
[38] Officials at PBGC told us that they are in the process of
expanding their existing program, which takes custody of and invests
pension assets of terminated defined benefit plans to include this new
role. PBGC hopes to open its program to terminating defined
contribution plans in 2016.
[39] In the future, additional alternatives to the forced-transfer IRA
may be available, such as the forthcoming "My Retirement Account"
(myRA), which is to be initially offered through employers.
[40] 26 U.S.C. § 411(a)(11)(D). Amounts rolled over into a new plan
from another workplace plan remain vested in the new plan, although
they do not count toward the vested balance for purposes of
determining eligibility for forced transfer once a participant has
separated from the plan.
[41] For example, some plans offer investment choices with fees that
reflect the lower pricing available for institutional grade shares. A
fund's "institutional" class of shares are generally available only to
investors of large sums, such as a pension fund or a trust for a
university, and are less expensive than share classes available to an
individual retail investor. GAO, 401(k) Plans: Labor and IRS Could
Improve the Rollover Process for Participants, [hyperlink,
http://www.gao.gov/products/GAO-13-30] (Washington, D.C.: Mar. 7,
2013).
[42] We chose the service sector for our projections because more than
half of defined contribution plans (like 401(k) plans) are in the
service sector and about 40 percent of defined contribution plan
participants, according to a 2011 report by the Employee Benefits
Security Administration. The annual salary data used for our
projections are for the food preparation-and serving-related
occupations.
[43] Our assumptions include plan service requirements, deferral
rates, employer-matching rates, and vesting, among other factors. All
our projections assumed a plan investment in a target date fund, the
most common default investment for automatic enrollment, with a return
of 6.30 percent, the geometric mean of 10-year average returns for all
target date funds ending July 31, 2014, based on GAO analysis of data
from Morningstar.com. See appendix IV to see all projections and
assumptions used.
[44] By statute, any such service requirement may extend no longer
than the later of the date on which an employee attains the age of 21
or completes 1 year of service. 26 U.S.C. § 410(a)(1)(A).
[45] PSCA's 55TH Annual Survey of Profit Sharing and 401(k) Plans,
(Reflecting the 2011 Plan Experience), table 11.
[46] Data are from the U.S. Bureau of Labor Statistics for both men
and women in January 2012. [hyperlink, http://data.bls.gov/cgi-
in/print.pl/news.release/tenure.t01.htm].
[47] SSA analysis of Form 8955-SSA data. SSA data include benefits
left behind by separating participants in all defined contribution
plans, including 401(k) plans, as well as in defined benefit plans,
which are not subject to forced transfers. GAO assessed the
reliability of the data and found that it met our standards for our
purposes.
[48] [hyperlink, http://www.gao.gov/products/GAO-13-30]. Plans are not
currently required to accept rollovers. One issue that plans have with
accepting rollovers is with verifying that funds coming from outside a
plan are legally tax qualified under the Internal Revenue Code. We
previously recommended that IRS and DOL work together to communicate
to plan sponsors IRS's guidance on the relief from tax
disqualification provided for plans that accept rollovers later
determined to have come from a plan that was not tax qualified.
Subsequently, on April 3, 2014, IRS issued guidance to ease the
process and make plan-to-plan rollovers less burdensome for plans. The
ruling provides a simple method for receiving plans to verify the tax-
qualified status of sending plans by checking a recent annual report
(Form 5500) filing for the sending plan on a public database. Rev.
Rul. 2014-9, 2014-7 I.R.B. 975.
[49] 29 C.F.R. § 2250.401a-2(c)(4).
[50] GAO, Retirement Savings: Automatic Enrollment Shows Promise for
Some Workers, but Proposals to Broaden Retirement Savings for Other
Workers Could Face Challenges, [hyperlink,
http://www.gao.gov/products/GAO-10-31] (Washington, D.C.: Oct. 23,
2009).
[51] U.S. Dept. of Labor, Field Assistance Bulletin 2014-01 (Aug.14,
2014).
[52] GAO, Private Pensions: Clarity of Required Reports and
Disclosures Could Be Improved, [hyperlink,
http://www.gao.gov/products/GAO-14-92], (Washington, D.C., Nov. 21,
2013).
[53] [hyperlink, http://www.gao.gov/products/GAO-14-92].
[54] 29 U.S.C. § 1023. The Form 5500 Series Report is the primary
source of information for both the federal government and the private
sector regarding the operation, funding, assets, and investments of
private pension plans and other employee benefit plans. DOL, IRS, and
PBGC jointly developed the Form 5500 so employee benefit plans could
satisfy annual reporting requirements under ERISA and the IRC.
[55] For a more complete description of plan reporting and disclosure
requirements, see [hyperlink, http://www.gao.gov/products/GAO-14-92].
[56] In addition, DOL officials told us that employer identification
numbers are often reported incorrectly. Questions on the Form 5500,
5500-SF, and schedules H and I require sponsors to provide information
on plan termination and transfers to other plans.
[57] [hyperlink, http://www.gao.gov/products/GAO-14-92].
[58] If the Notice is regarding a defined benefit plan it will include
information about the estimated benefit due to the participant at the
time that they separated from their employer.
[59] According to SSA, individuals who apply for Title II disability
benefits will receive the Notice at the time of filing that
application, which may be earlier than age 62.
[60] Advertising efforts can be effective in routing an interested
public toward otherwise underused federal resources and websites.
Officials at PBGC told us that when one retiree advocacy organization
published information about PBGC's registry of lost accounts the
agency saw a surge in online hits to the registry.
[61] 42 U.S.C. § 1320b-13. The Statement also explains how benefits
are estimated. See GAO, Social Security Statements: Observations on
SSA's Plans for the Social Security Statement, [hyperlink,
http://www.gao.gov/products/GAO-11-787T], (Washington, D.C., July 8,
2011). The earnings history shows an individual's income subject to
Social Security tax. Not all earnings are subject to Social Security
tax. The law also requires each statement to contain the following: an
estimate of the potential monthly Social Security retirement,
disability, survivor, and auxiliary benefits and a description of the
benefits under Medicare; and the amount of wages paid to the employee
and income from self-employment, among other things.
[62] The mailings will be sent to workers aged 25, 30, 35, 40, 45, 50,
55, 60, or older, who have not created an online account with SSA.
[63] A service bus is technology that manages access to applications
and services to present a simple, consistent interface to end users
online.
[64] To contact retirees, the Swiss use the address where retirees
receive their public pension, much like SSA sends U.S. retirees a
Potential Private Retirement Benefit Information notice.
[65] Officials said while these transfers move accounts without
affirmative participant consent, if participants explicitly request
that their account not follow them from job to job, they are permitted
to opt-out of the process and leave their account behind in their
previous employer's plan.
[66] Although regulations implementing the 2014 Pensions Act are not
final, the U.K. Department for Work and Pensions consulted with
stakeholders who suggested that once an individual leaves a job, that
employer might upload information about their account there to a
database. The employee's new employer would search the database for
details of the old account, inform the individual of the transfer
process, and if the employee does not opt-out, contact the employee's
old plan to request the transfer. Stakeholders thought that a
combination of full name, National Insurance Number, and date of birth
could be used to successfully match members with their accounts in the
United Kingdom.
[67] To learn of industry efforts in the United States to help plan
accounts follow participants, we spoke with a forced-transfer IRA
provider who markets itself as a clearinghouse that will find the
participant and their current plan, and consolidate their forced-
transfer into it. The forced-transfer IRA provider has used data from
service providers to identify participants' current plans, and has
successfully transferred thousands of accounts to the current plans of
participants.
[68] The amount of interest paid, which has been equal to inflation
since July 1ST 2013, is set by regulation.
[69] While the Belgian pension registry is not scheduled to be
operational for participants until 2016, plans already have some
access to the data.
[70] A representative of a plan in Belgium said the plan shares each
participant's terms of benefit contract with the pension registry. As
a result, an individual who disagrees with their retirement benefit
has the opportunity to access the actual contract, which, according to
one Belgian plan, resolves the vast majority of disputes.
[71] Providing the functionality to view and analyze such
comprehensive information in the United States could overlap with
private sector financial planning tools which analyze information
provided by individuals.
[72] The pension registry (PensionsInfo) in Denmark did not require
legislation. Danish University Professors said initial discussions
centered on leading people to an understanding of their retirement
benefits, but to understand them, people had to know what they were.
[73] According to European Commission officials, the Netherlands,
Latvia, Bulgaria, France, and Austria all provide part consolidated
online retirement account information to participants on a secure
website. In addition to the one in Denmark, European Commission
officials said pension registries in Sweden, Finland, and Norway also
analyzed the data for participants for financial planning purposes.
[74] According to PBGC officials, the agency is working with DOL and
IRS to develop a proposal to implement the expansion.
[75] In 2013, the Advisory Council on Employee Welfare and Pension
Benefit Plans, also known as the ERISA Advisory Council, held 2 days
of public hearings on June 4, 2013, and August 28, 2013, to hear
testimony about "Lost Participant" issues from a number of
constituencies. See Advisory Council on Employee Welfare and Pension
Benefit Plans, Locating Missing and Lost Participants, (Washington,
D.C.: November 2013).
[76] As described in the report, plans must transfer forced out
balances of $1,000-$5,000 to forced-transfer IRAs and have the option,
but are not required, to transfer smaller forced-out balances into
forced-transfer IRAs.
[77] We asked PLANSPONSOR.com to include questions about plan
sponsors' use of forced transfers in its newsletter, which is
distributed to online subscribers. Respondents to the query included
14 plan sponsors and 4 third-party administrators/record keepers.
[78] When a plan issues a distribution check, either at the request of
the separated participant or after the forced transfer of a
participant with a balance below $1,000 when the participant has given
no instructions, the check often remains uncashed. The funds
represented by uncashed checks could be very significant. Several
industry professionals have estimated that uncashed distribution
checks may represent billions in retirement savings. Checks may remain
uncashed because the mailing address is out of date and the check is
undeliverable or the recipient either forgets or opts not to cash the
check. Uncashed checks leave plans in a difficult and ambiguous
position. By transferring balances to a forced-transfer IRA, plans can
complete the forced-transfer of participants with these small accounts
and conclude their relationship to the former participant consistent
with their fiduciary standard of care. Some plans that would like to
use forced-transfer IRAs for this purpose may have difficulty finding
a provider willing to accept balances under $1,000, perhaps because--
as indicated by several providers we interviewed--providing the
accounts is not very profitable. However, for some force-out IRA
providers, filling this gap in service by providing force-out IRAs for
small balances is part of their business model. Two providers we
interviewed accept transfers down to $1.
[79] 26 U.S.C. 401(a)(31)(B)(i) and IRS Notice 2005-5, 2015-1 C.B. 337.
[80] While there is no stated regulatory requirement, prudence under
section 404(a) of ERISA dictates that a plan search for participants
before distributing benefits when it is known that a participant is
missing, e.g., the plan receives a returned 402(f) notice or other
disclosure notice. Plans could use the search steps in FAB 2014-01 for
terminating plans as a guide to searching for missing participants in
ongoing plans.
[81] Among the forced-transfer IRA provider data we reviewed, the
median annual fee was $42, although the highest was $115 plus a small
percentage of assets. Annual fees sometimes include address search
services, but sometimes extra search fees are applied to the account.
[82] PSCA's 55th Annual Survey of Profit Sharing and 401(k) Plans.
Another 42 percent simply cash out balances less than $1,000 and let
larger balances remain in the plan, while 7 percent allow balances of
any size to remain in the plan after a participant separates. There
are no comprehensive federal or private industry data on the number of
forced-transfer IRAs created or the amount of employer-based
retirement savings transferred into them.
[83] One provider did not provide the number and value of accounts
opened, so these totals reflect data for 9 of the 10 companies for
which we collected account fee and return data.
[84] SSA analysis of Form 8955-SSA data. SSA data include vested
benefits in all defined contribution plans, not just those from 401(k)
plans, as well as defined benefit plans. We previously reported that
data from the form 8955-SSA on potential benefits that retirees may be
owed by former employers are not always updated or verified over time.
GAO, Private Pensions: Clarity of Required Reports and Disclosures
Could be Improved, [hyperlink, http://www.gao.gov/products/GAO-14-92]
(Washington, D.C., Nov. 21, 2013). Because defined benefit plans do
not use forced transfers, those accounts are not subject to these
rules. We determined that the data provided were reliable for our
purposes.
[85] Accounts of less than $1,000 could also be transferred to IRAs,
absent participant instruction.
[86] We identified the largest forced-transfer IRA provider among
those we interviewed based on total forced-transfer IRAs under
management. We identified forced-transfer IRA providers through
interviews with experts, government officials, other forced-transfer
IRA and general IRA providers, and a literature review.
[87] Plans cannot use forced-transfer IRAs unless their summary plan
description or a summary of material modifications to the plan
reflects such a policy and communicates it to plan participants as
prescribed by regulation. 29 C.F.R. § 2550.404a-2(c)(4).
[88] PSCA's 55TH Annual Survey of Profit Sharing and 401(k) Plans,
table 132, "Pre-retirement distributions options offered." Data
reflect 2011 plan experiences.
[89] The forced-transfer IRA accounts are not profitable for the
company so they only offer them as a service to ongoing clients with
an active plan looking to transfer eligible balances.
[90] U.S. Dept. of Labor, Field Assistance Bulletin 2014-01 (Aug. 14,
2014).
[91] The geometric mean of the 10-year average return for all target
date funds ending July 31, 2014, according to our analysis of data
from Morningstar.com.
[End of section]
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