SURVEY SAYS: Use of Safe Harbor IRAs

For plan sponsors, this could be an administrative and cost concern. Regulations have been enacted allowing plans to automatically distribute small account balances. The law now requires that if a plan issues mandatory distributions of balances less than $5,000, retirement plan mandatory distributions of $1,000 to $5,000 must be automatically rolled into an IRA (safe harbor IRA) instead of being paid out in cash, unless the participant elects otherwise.  

There isn’t much information available about adoption of mandatory distribution policies and usage of safe harbor IRAs.

So last week, I asked NewsDash readers whether their current firms automatically roll over small plan balances of $5,000 or less into a safe harbor IRA, and why or why not?

Seventy-eight percent of respondents work for a plan sponsor and 22% work for a TPA/recordkeepeer/investment manager. All responding readers reported they do not have a defined contribution (DC) plan account balance of less than $5,000 in a former employer’s plan. In addition, all reported they have not had an account balance of less than $5,000 automatically rolled into a safe harbor IRA by a previous employer?

Slightly more than 17% of respondents indicated their firms do not have a mandatory distribution policy for balances less than $5,000, so don’t use safe harbor IRAs. However, among those whose firms do have such a policy, 53% said their firms did so because they wanted to reduce cost from additional participants or participant balances, and 47% said it was because they wanted to reduce complexity/administration of tracking too many terminated, non-cashed-out participants. Nearly 24% wanted to reduce responsibility for investment of those balances, and 11.8% indicated they do not know why their firms chose to adopt the policy. One participant said his or her firm wanted to keep the participant count below the level for which the plan audit requirement is triggered.

Readers were also asked if their mandatory distribution policy includes the use of safe harbor IRAs to roll over balances of $1,000 or less. Nearly 6% said yes, while slightly more than 88% said they automatically cash out those balances. Nearly 6% indicated they have no mandatory distribution policy for balances of any size.

Among those whose firms that have not implemented a mandatory distribution policy using safe harbor IRAs to cash out balances less than $5,000, 43% said they haven't considered the policy, or discussed it with the plan committee. More than 28% indicated they do not have a problem with a lot of small balances, and 14.3% each said they "want to allow participants to take advantage of plan investments/costs" or they’ve "considered it, but haven’t implemented it yet." However, the majority (57.1%) specified another reason for not adopting such a policy, including not being aware of the option, the CEO not approving it, and wanting to avoid the administrative burden of rolling over the small balances.

Asked how likely it is their firms will adopt such a policy in the future, half of participants said they do not know. One-quarter reported it is unlikely because their firms do not have a problem with a lot of small balances or do not see many advantages for such a policy. The remainder of those responding to the question (12.5% each) either said it is likely because they have discussed such a policy and see advantages for administration and cost, or it is very unlikely because their firms have already decided not to implement such a policy for one or more of the reasons listed in the previous question.

Among the few verbatim comments were a couple more important considerations for adopting a policy to distribute small plan balances. Editor’s Choice goes to the reader who said: “Hmmm, I would submit that if I answered 'yes' to the lead question [about having a small plan balance in another employer’s plan] I shouldn't be in this business.”

Thank you to those who responded to the survey!

Verbatim

It's all about the cost of small accounts.

Moving terminated participants out quickly is much easier than trying to find them once they reach 70 1/2.

Administratively a wise thing to do!

Hmmm, I would submit that if I answered "yes" to the lead question I shouldn't be in this business.

There is a concern that these small balances do not cover administration fees. We are looking for ways to handle that problem. Auto Rollover usually means the participant will pay even MORE expenses than within the plan. Need to solve the fair distribution of expenses rather than force people out.