Compliance February 10, 2023

SECURE 2.0 RMD Change Could Cause Trouble in States With Certain Unclaimed Property Laws

Kentucky, Maine, Colorado and Nevada will have to update their escheatment laws or take the risk of unjustly taking over some residents’ IRAs.

 

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The SECURE 2.0 Act of 2022, passed in December 2022, increased the required minimum distribution age for withdrawals from individual retirement accounts to 73 this year. In 2033, the RMD age will increase to 75, per the same section of the law. However, due to the escheatment, or unclaimed property, laws in certain states, some IRAs could be considered abandoned if they are left untouched until age 75.

In Kentucky, Maine, Colorado and Nevada, individual retirement accounts are considered abandoned if they are unclaimed three years after the participant turns age 70.5, which was the RMD age prior to the first SECURE Act, passed in 2019. After 2033, therefore, if participants wait until age 75 before taking the RMD, their IRAs could be considered abandoned when they hit age 73.5, absent any legislative change from their respective states.

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IRAs, unlike employer-sponsored retirement plans, are subject to an RMD even if the participant is still working.

Michael Giovannini, a partner at the Alston & Bird law firm, explains that IRAs must be escheated to the state government if they are unclaimed within the time period established in state law. The owners, or their beneficiaries, can still claim that property at any point in the future, but many people do not know they can claim it or how to do so. As one example, Kentucky’s treasury department says its unclaimed property fund has a value of nearly $800 million.

State-by-state information on unclaimed property, maintained by the National Association of State Treasurers, is available here.

Giovannini says this is only an issue for IRAs, since ERISA pre-empts state laws for employer-sponsored plans, which are therefore not escheatable to state governments.

Many states have set their abandonment age for IRAs to a specific age, rather than tying it to the IRS’ RMD age, Giovannini explains. Other states, such as Illinois, Washington, Vermont and North Dakota, have laws which also say that an IRA is considered abandoned after three years, but those states start the clock at age 72, instead of 70.5. This could still create a problem if there is a delay in collection after age 75 or if the RMD age is increased again. Giovannini recommends that states simply tie their escheatment laws to the federal RMD age, so it need not be changed.

When IRA funds are escheated, they are typically liquidated and taxed before being transferred to the state treasury. This means they will also cease accruing any interest, as assets do while still in an IRA. States also often set aside an estimate of unclaimed property in their budgeting, knowing that some unclaimed property will remain unclaimed indefinitely, according to Giovannini. He adds that, “Some states are better at returning property than others.”

Products February 10, 2023

Morningstar and PAi Partner on ESG-Driven Pooled Employer Plan

Recordkeeper PAi will run a PEP backed by Morningstar’s ESG overlay, with the firms citing the recent DOL ruling that allows for ESG consideration in retirement plans.

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Plan Administrators Inc. and Morningstar Inc.’s retirement investing division have launched a pooled employer plan comprised of funds that limit exposure to environment, social and governance risks.

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The two firms announced that the PEP became available to firms on January 30, after first introducing the concept in October 2021. Chicago-based Morningstar will be the 3(38) investment manager of the plan—responsible for selecting, managing and monitoring the funds—and PAi will be the pooled plan provider, according to the firms. PAi is a subsidiary of retirement services provider Newport Group Inc., which acquired the third-party administrator in 2020.

Morningstar and PAi are launching the PEP on the heels of the U.S. Department of Labor finalizing a rule in November 2022 that retirement plan fiduciaries can consider ESG factors when selecting investment for defined contribution retirement plans. It also comes, however, shortly after 25 Republican states filed a challenge to the rule in a Texas federal court, continuing the debate and discussion of ESG investing’s future in retirement savings.

“The Department of Labor ruling is a great win for employers and advisers, as it gives them options to choose investments that not only provide an appropriate diversification and return profile, but also gets employees engaged with their retirement savings and comfortable that their investments are being mitigated against long-term ESG risk,” Brock Johnson, president of global retirement and workplace solutions at Morningstar, said in a statement.

The PEP will be offered on PAi’s CoPilot recordkeeping platform, which seeks participant engagement through event-based alert messages, and a separate tool that shows participants how long their savings are expected to last, Columbia, South Carolina-based PAi said in the announcement.

There are no employers signed up yet for the PEP, but the firms have received a number of interested parties in the option since introducing the idea in late 2021, according to a spokesperson.

Morningstar Investment Management will select and manage the investment lineup for the PEP using the same qualitative and quantitative processes it uses to oversee the investments in 21,756 plan lineups—as of the third quarter of 2022—as part of its 3(38) and 3(21) fiduciary service, according to the firm. Morningstar has also designed a custom target-date model for the PEP that will use the underlying investment lineup to provide a default investment option and a glide path to retirement for participants.

The ESG analysis includes manager interviews and a review of each fund’s Morningstar Sustainability Rating, the firm said. Within its ESG retirement plan methodology, Morningstar notes that it will “focus on selecting funds that work to mitigate material environmental, social, and governance risks that could impact the risk and return of an investment. We do this while also meeting our rigorous selection criteria for retirement investments, including the consideration of the risk of loss and opportunity for gain of a fund in alignment with the plan’s purpose, and assessing how those selections compare to available alternatives.”

PEPs were originally introduced in late 2019 with the passage of the Setting Every Community Up for Retirement Act. The retirement plan vehicle was designed with input from the retirement industry as a way to offer retirement plans to small businesses at lower cost and with less administration and fiduciary burden.

In December 2022, passage of the SECURE 2.0 Act of 2022 made PEPs available for non-profit 403(b) plans as well, extending them to a sector that has previously been familiar with shared-employer benefits through multiple employer plans.

“Working with Morningstar Investment Management will help employers meet the needs of their employees with a lineup that would otherwise be difficult for a plan sponsor or advisor to recreate and manage themselves,” Amy Hermann, director of sales and marketing at PAi, said in the statement.

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