401(K) Plans: Greater Protections Needed for Forced Transfers and Inactive Accounts

Highlights

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.

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.

Recommendations

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.

Matter for Congressional Consideration

Matter	Status	Comments
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 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.	Closed – Implemented	In February 2018, Congress proposed the "Retirement Savings Lost and Found Act of 2018" that would provide--among other things--an alternative default destination for forced transfers from 401(k) plans. The Lost and Found described in this legislation would be one way to better protect the retirement savings of individuals who change jobs and leave behind inactive accounts. It would not only allow for the savings to be invested in a manner likely to preserve the balance over time, but would also centralize the information about the savings, making it easier for individuals to reclaim.
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 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.	Open	As of March 2024, there has been no Congressional action on this recommendation. Although the SECURE 2.0 Act of 2022 raised the amount of vested savings that could be forced out of a 401(k) plan, it did not address whether or not the definition of vested savings for this purpose would continue to exclude rollovers. We reported that rollover savings are always vested when they are transferred into a plan account, but the law permits plans to ignore rollover savings when calculating the vested balance eligible for forced distribution and transfer. Having embraced new policies around auto-portability, we continue to believe it is important for Congress to consider whether all of an individuals' vested savings--including rollover amounts--should be included in the calculation of their balance when determining whether it can be involuntarily distributed from the plan.

Recommendations for Executive Action

Agency Affected Sort descending	Recommendation	Status
Department of Labor	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, the Secretary of Labor should 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.	Open As of September 2023, DOL had not implemented this recommendation but reported two significant legislative developments relating to the outcome for missing participants' accounts. One development is a requirement to establish a Retirement Savings Lost and Found, which will make it possible for participants to more easily locate their retirement savings when it has been forced out of their former plan. The other development is a new statutory prohibited transaction exemption that will facilitate "automatic portability transactions", which involve automatic transfer of assets held in an IRA after an involuntary cashout under Code section 401(a)(31)(B)(i), to an employer-sponsored plan of the IRA owner, when a match is found. However, both developments will continue to depend on the use of forced-transfer IRAs. Without expanding the investment options available to these special IRAs, the savings in them will continue to earn low returns that may not preserve their savings. Meanwhile, DOL continues to focus attention on reducing the incidence of missing participants, which can be a cause of forced-transfer IRAs. In January 2021, DOL issued guidance to help plan fiduciaries meet their obligations under Title I of ERISA to locate and distribute retirement benefits to missing or nonresponsive participants. Reducing missing participants is a worthwhile goal, but as long as there are any missing participants whose savings are transferred to IRAs, there is a need for DOL to allow the providers of those IRAs to invest the retirement savings in a manner that will better preserve the principal should the account remain unclaimed for an extended period. Therefore, we continue to encourage DOL to leverage its work to establish qualified default investment alternatives, used for the auto-enrollment safe harbor rules, to expand the investment options permitted under the safe harbor for forced-transfer IRAs.
Department of Labor	Priority Rec. To ensure that individuals have access to consolidated online information about their multiple 401(k) plan accounts, the Secretary of Labor should 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 Social Security Administration, Pension Benefit Guaranty Corporation, and Internal Revenue Service, who could identify areas to be addressed through the regulatory process, as well as those that may require legislative action.	Closed – Implemented The Department of Labor (DOL) has taken substantive steps that largely accomplish the goals of our recommendation. As of March 2022, the DOL had ongoing engagements with a range of stakeholders on issues surrounding missing and unresponsive participants, including representatives of plans, employers, financial services groups, consumer groups, and state unclaimed property funds. In meetings with relevant stakeholders on missing participant issues, DOL sought informal input on GAO's pension registry recommendation in light of existing government and private sector efforts. In addition, the agency said it is monitoring legislative action on these matters, which have included repeated bi-partisan proposals for a national, online registry of Americans' retirement savings account information, and provides technical assistance if and when requested. Together, these activities largely accomplish the goals of the taskforce that we recommended. Retirement plan participants' lack of access to consolidated online information about their 401(k) plan accounts remains an issue and we encourage DOL to continue to work with stakeholders to address challenges and support solutions that help Americans to improve their secure retirement by more effectively tracking and managing multiple retirement accounts.
Social Security Administration	To ensure that 401(k) plan participants have timely and adequate information to keep track of all their workplace retirement accounts, the Social Security Administration's Acting Commissioner should 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.	Open As of October 2023, SSA continued to disagree with this recommendation. In responding to one suggested way of making information on potential vested plan benefits more accessible to individuals before retirement--namely, including it on the SSA benefits statement, SSA has stated that adding such information would place the agency in a position to respond to issues or questions about ERISA and private pension plans, about which the agency has no firsthand legal or operational knowledge. However, as we acknowledged in our report, the current potential vested plan benefits notice refers those with questions to contact DOL and inquiries made to SSA could seemingly be redirected with minimal effort. SSA also objects to the recommendation because they believe combining private pension information on the SSA benefits statement could confuse the public who might wrongly conclude that Social Security benefits and private pension benefits are related. While the two benefits are unrelated legally, on a practical level they are very much related for working Americans who receive the SSA benefits statement. For example, consideration of both benefits can help individuals make better claiming and draw-down decisions to better optimize their retirement income security. Moreover, this recommendation is for the agency to make its information on potential vested plan benefits more accessible to individuals before they are claiming retirement benefits, which could occur in ways other than including this information on the SSA benefits statement. It is important for individuals to know about their lost savings because, our report showed, benefits forgotten or lost in retirement plans can sometimes be transferred to special IRAs where the balances may remain unclaimed and decline over time. SSA is the agency responsible for alerting workers of their potential vested pension benefits. If the notice were conveyed earlier in their working life, an individual could better use the information to track down their savings and roll it over to a new plan or IRA, where they could better invest their savings and benefit from it in retirement. Although workers can proactively request the information from SSA before retirement age, very few do so. As we reported, SSA officials told us that they had received just 760 requests for the potential vested benefits data in a given year, from over 33 million individuals for whom they held records at the time of our report. As long as SSA remains responsible for maintaining and communicating information on vested benefits to separated workers, GAO stands by its recommendation that the agency make the information more accessible before retirement so workers can more easily find their savings and benefit from more optimal investment over time.