The Case for Automatically Moving Mandatory Distributions Forward
The mandatory distribution-to-Safe Harbor IRA plan feature as commonly utilized today was conceived in 2001 and launched in 2005 with good intentions, and for valid reasons. A mobile workforce, combined with a lack of retirement savings portability, had created a burgeoning problem for plan sponsors: an explosion of small-balance (less than $5,000) accounts left “stranded” in-plan, resulting in rampant cashouts, missing participants, uncashed distribution checks and the like. These problems only accelerated with the widespread adoption of auto enrollment, beginning in 2009.
While automatic rollover programs provided a measure of relief to the problems faced by plan sponsors, they inadvertently consigned their former plan participants to Safe Harbor IRA “landfills” – where cashouts continue and account fees erode their balances.
Fortunately, there’s a more-responsible answer: to systemically “recycle” these Safe Harbor IRA balances back into the defined contribution system.
First, Some History and Simple Math
In 2001, when Congress passed The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), it gave birth to the Safe Harbor IRA by amending the Internal Revenue Code to add a requirement that mandatory distributions in excess of $1,000 must be paid in a direct rollover to an IRA. At this time, T-Bill rates were over 6%. In March 2006, when the Department of Labor issued safe harbor regulations launching the automatic rollover, T-Bill rates were 2.6%. Today, T-Bill rates are .075%. This is material because the IRA agreement the plan fiduciary must enter into as per the regulations must provide that the investments “will be those designed to minimize risk, preserve principal while providing a reasonable rate of return, and maintain liquidity, such as money market funds, interest-bearing savings accounts, certificates of deposit and fully benefit-responsive stable value funds.”