A Brief History of Automatic Rollover IRAs
Since being introduced in 2001, automatic rollover IRAs have gone from legislative footnote to fiduciary best practice. We recently wrote a whitepaper detailing the history of automatic rollovers, current trends, and their future outlook. This post is the first in a series of five sneak peeks from the new whitepaper, Automatic Rollover IRAs: From Legislative Footnote to Fiduciary Best Practice, written by Terry Dunne, SVP and Managing Director of Retirement Services.
In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) refined the rules for plans with cash-out provisions. In active plans, participant accounts with balances between $1,000 and $5,000 could be automatically transferred into a Safe Harbor IRA, unless the participant selected a different distribution option.
After EGTRRA, it took a few years for the DOL to clarify the rules and establish a fiduciary safe harbor for terminating plans. In Field Assistance Bulletin 2004-02, the DOL addressed two critical issues:
“What does a plan fiduciary need to do in order to fulfill its fiduciary obligations under ERISA with respect to: (1) locating a missing participant of a terminated defined contribution plan; and (2) distributing an account balance when efforts to communicate with a missing participant fail to secure a distribution election?”
Since then, DOL guidance has offered insight to the processes for properly managing missing and non-responsive small balance participants, including a discussion of three potential distribution options:
Automatic rollovers to Safe Harbor IRAs,
Escheatment to state unclaimed property funds, and
Interest-bearing, FDIC-insured bank accounts.
Automatic rollover IRAs were established as the DOL’s preferred choice because the solution is “more likely to preserve assets for retirement purposes than any of the other identified options.” Escheating assets or moving balances to bank accounts were less palatable because they could trigger income tax withholding and premature withdrawal penalties. Both negatively affect retirement readiness.
Subscribe to our blog or check back next week for the second post in this series.
The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.