EGTRRA Default IRA

[Guest JMKirschbaum]

Have any IRA providers publicized the availability of their products specifically as a designated IRA for employers to use to send the default rollovers for small distribution amounts (under $5000 and over $1000) under EGTRRA?

[mbozek]

I thought that nothing was going to happen until the appropriate agency ( DOL) issues regs specificying how this provision will be implimented. Also I think the IRA custodial agreements would have be amended and approved by the IRS to allow an account to be opened by someone other than an employee. Frankly I dont know why the custodians would want the business because what would be a prudent investment for the assets, does plan have fid liability for anything that happens after transfers, who will pay annual admin charges for maintaining account and will funds be escheated to state after statutory period? Will the provision benefit the state coffers though escheat? Also what about minimum distribution if the participant never claims the assets. Yuck-- who would want to administer this business. Also why would plan sponsors want to voluntarily give up assets that can contribute toward payment of admin charges?

[MGB]

I am often in technical meetings with representatives from the largest IRA providers in the country. None of them want anything to do with this business. Mbozek's comment that nothing will happen until after the DOL issues regs. is correct. I don't expect that for years.

As far as the last statement in Mbozek's post, that isn't correct. There is no voluntary action here. If the plan has an automatic cashout provision, they MUST rollover amounts in excess of $1,000; there is no option to keep the money in the plan.

[Guest JMKirschbaum]

Thanks for your input. So where does that put employers? I agree that there is no option - but if there are no providers are employers going to have to force this on the current provider? If there is no company willing to take these funds are the employers going to have to amend their plans to keep the distributions until there are other options available? Has there been any guidance whatsoever from Treasury?

[MGB]

Treasury has nothing to do with this at this point. The provision is in complete suspense until the DOL issues regulations. Anyone that has tracked the DOL's experience on issuing regulations knows that it hasn't even shown up on their radar screen yet to even start to address it. Although the law directed them to come up with regulations within three years, neither the DOL nor Treasury has ever paid any attention to these fictitious deadlines.

Until the DOL produces regulations, no one is paying any attention to the provision. Once it finally becomes mandatory in plans, there obviously will be somebody out there that will create a market for the rollovers. No one can force any IRA provider to do this.

The biggest stumbling block will be that the legislative history of this provision included descriptions that these automatic IRAs be of no cost or significantly low cost to the participant.

[mbozek]

Tks- I had forgotten that this piece of ridiculous legislation requires mandatory transfers after regs are issued. I think that the only IRA providers who will take the business are those who will charge high fees to maintain samll accounts and invest the funds in low yielding investments such as T-bills. I do have question as to whether an employer can eliminate the involuntary cashout entirely (since it is not required for qualification) to avoid this nonsense In other words if the plan provides that benefits are not immediatley distributable upon termination then no transfer is required.

[MGB]

By the way, a little history:

The Portman-Cardin legislation that became EGTRRA (although about 20 provisions were dropped along the way) was seen as very pro-business. In order to get broad bipartisan support, the politics of the situation required them to include provisions that AARP wanted. This one is theirs. Without this, AARP would have pulled support along with the dozens of Congressmen that are beholden to them. Their rationale was that there is too much leakage in the retirement system from people not rolling over their cashouts out of apathy and that this would stem the tide of some of that leakage.

Given that the AARP is in the insurance and investment business, I am sure there will be a market for these rollovers, even if it is only one AARP-endorsed provider.

[mbozek]

MGB: Does the AARP understand that under state laws IRA assets are subject to escheat after a statutory period of between 1-3 years and states vigoriously audit banks, brokerages and ins co to recover such assets (including any IRAs sponsored by AARP affiliates). Once the assets escheat to the state no further earnings are paid on the accounts. I dont know how this provision will benefit the participants.