A Simple Solution to Auto-Portability
In my last blog, I reviewed an article that focuses on the notion of “auto-portability” to make it easier to transfer Default/Missing Participant IRA accounts to a new employer’s plan. While the concept has merit, my opinion is that the solution seems overly complex, and is therefore not likely to be supported by record keepers or plan sponsors.
Shortly after last year’s GAO report was released, there was another idea proposed that also seems to have merit. This concepts suggests that when someone goes to work for the first time with an employer that sponsors a retirement plan, that employee would have to establish a Default IRA that would be registered with the Social Security Administration (SSA). Every time the employee leaves a company with money in a retirement plan, those funds would be directly transferred to his or her Default IRA – without the need for time-consuming paperwork or benefit election forms. The individual would then have the option to transfer the funds to their new employer’s plan or leave it in this new type of Default IRA. This IRA could be invested in either an inflation-protected government bond or target date fund, as an example.
Of course, such a program would eliminate the need for the auto-rollover IRA program, and in time that service would go away. The employer holding the funds would simply inquire with the SSA as to the participant’s individualized Default IRA and transfer the funds to it. At normal retirement age, when SSA notifies citizens of their eligibility to begin claiming social security benefits, they would also notify them of their individualized Default IRA account.
The Advantages of a Master IRA
But wait, there’s even a simpler way to achieve the same results!
This would involve creating a Master IRA, with each deposit being reported to the SSA, as we are currently required to do for terminated participants with vested account balances that have been gone for a year (form 8955-SSA.) Participants could not withdraw the funds until age 55, and could not borrow from the account. When it comes time for the participant to begin receiving their social security benefits, the SSA would already have the information to advise them of their Master IRA account and where to apply for those benefits.
Consolidating all of an employee’s accounts into a Master IRA would ensure continuity of the investment return by helping to sustain the value of the assets while keeping pace with inflation. It would provide guidance for missing participant funds and enable plan sponsors and administrators to uphold their fiduciary duties. And it would remind participants of their plan assets when they file for social security benefits.
Many countries already have legislation in place that provides for the consolidation of transferred accounts, either in a participant’s new plan or with other forced-out transferred accounts. This enables these accounts to grow, either at a rate comparable to participants’ current retirement accounts, or at least keeping pace with inflation. You can learn more about how the U.K., Switzerland, Australia and other countries are attempting to deal with protecting forced transfers and tracking accounts by reading the 2014 GAO Report
NRURB Provides a Useful Tool
The European Union is also examining the use of a registry that former participants can use to search for prior benefits. In the U.S., we do not have a government pension registry that can provide those opportunities. The Pension Benefit Guarantee Corporation (PBGC) does provide a way for former plan participants to search for unclaimed defined benefit funds. However, given that many of the retirement accounts in the U.S. today are defined contribution plans, the PBGC cannot help with those searches.
However, we do have the National Registry of Unclaimed Retirement Benefits (NRURB), which is a public service company designed to help reunite plan participants with their retirement money. Sponsored, supported and operated by PenChecks, Inc., this service offers a robust search system that is available to anyone, including plan sponsors, government entities, institutions and TPAs at no cost – it is a free service.
When a plan sponsor sets up a Default IRA with PenChecks Trust, the website will automatically conduct an annual search for the participant as long as the account remains active. Anyone can register a former employee or plan participant on the NRURB site, even if the Default IRA is set up with a different company. However, this approach will not be included in the automatic annual search.
We are adding a new feature that will allow employers to search by social security number to see if any new employees have a Default IRA registered on the NRURB site. If so, the employer can alert the employee and ask if they would like to transfer the account into the company plan.
We believe that using the NRURB service adds another layer of fiduciary compliance for companies, as it demonstrates they have closed the circle of trying to locate the individual, and taken advantage of everything available to help reunite the participant with their money.
As American workers change jobs more frequently and the need to save for their own retirement becomes more critical, our industry needs to develop solutions that will support retirement account portability. For the benefit of all, let’s keep them as simple as possible.
President and CEO