Master IRA Account: An Idea Whose Time Has Come
Each year, millions of employees change jobs in the U.S., with many leaving their retirement savings in the former employer’s 401k plan. In fact, during the past 10 years, 25 million participants in workplace plans separated from their employer and left at least one retirement account behind. According to the GAO, leaving these assets in the former employer plan practically guarantees that they will lose value over time.
To make matters worse, employees who change jobs frequently often end up with multiple retirement accounts. With no standard way to consolidate their accounts into one, it increases the odds of the money getting lost, mismanaged or both. And the smaller the account, the less likely participants are to be reunited with their money, as the value of small accounts declines more rapidly.
Nobody Benefits from Lost Assets
According to the Social Security Administration, from 2004 to 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. Unless participants leave explicit instructions to do otherwise, their left-behind plans can transfer their savings into an IRA without their consent. Over time, account fees and low interest rates from these forced-transfer IRAs can seriously erode the value of the assets.
Employees with multiple abandoned plans rarely have the opportunity to consolidate their accounts by rolling over savings from one employer’s plan into the next. Communicating with multiple former employers or Auto Rollover providers can be difficult. And key information on lost accounts is often held by different plan providers, making integration of those accounts highly complex, if not impossible.
Master IRA – A Smart Idea
As one who has toiled in the retirement plan space for several decades, I believe that America’s workers deserve better. Therefore, I would like to propose a solution – the Master IRA account. Here’s how it would work.
The moment a person becomes a participant in any qualified plan for the first time, a Master IRA account gets established in their name. Thereafter, each time the participant changes employers, their account balance – regardless of size – is automatically transferred to their Master IRA account. This account would remain with the participant for their entire working career, and would be tied to a national registry of accounts.
If a plan sponsor could not locate a former participant, it could use the registry to locate their Master IRA and transfer the funds to it. Participants could not withdraw the funds until age 55, and could not borrow from the account. Additionally, once the Master IRA is established, it should be recorded with the Social Security Association. When a participant files for their benefits, the SSA can remind them that they have a Master IRA and are eligible to claim the benefits (as is currently done with Schedule 8955-SSA for participants that have been gone from a qualified plan for at least a year).
Consolidating all of an employee’s accounts into a Master IRA account would provide many benefits to plans and their participants:
- Ensure continuity of the investment return
- Help sustain the value of the assets while keeping pace with inflation
- Provide guidance for missing participant funds
- Enable plan sponsors and administrators to uphold their fiduciary duties
- Notify participants of their plan assets when they file for social security benefits
Where Do We Go from Here?
Why haven’t we taken similar steps in the U.S.?
Currently, we have no clear guidance from the IRS or DOL on these matters. And unless the law is changed to provide an alternative destination for forced-out account balances, their hands are tied. As a result, former plan participant’s savings will continue to be placed in investments unlikely to be preserved or grow over the long term. Even if the laws change, implementing a Master IRA solution would require a cooperative effort involving both the government and private sectors – but it can be done. As an industry, we owe it to the people we serve to take better care of their retirement funds.
In the interim, making the plan-to-plan rollover process simpler and using target date funds are small steps that could be taken to preserve plan assets. But with more and more American workers changing jobs on a frequent basis, I believe some type of master account approach offers our best option for a long-term solution.