Small Balance Rollovers to Safe Harbor IRAs
When a plan participant separates from service with an employer, the retirement plan sponsor can choose to distribute the account owner's remaining account balance without consent if the balance is under a certain dollar amount. Under prior law, the employer was required to directly roll over balances that exceed $1,000, but are less than $5,000, into an IRA unless the participant directs otherwise. Under SECURE 2.0, the $5,000 limit is increased to $7,000 for distributions made after December 31, 2023.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about allowing employers to roll over small balance 401(k) accounts into safe harbor IRAs if the employee has not proactively made their own rollover.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: Absolutely. In the end, it's up to the account owner to monitor and manage their retirement savings accounts. Employers shouldn't be forced to take responsibility for small balances left behind by former employees--or, in reality, any balances left behind by former employees. Allowing employers to transfer small balance accounts out of their overall plan is the most sensible way to handle these small accounts.
Bloink: The reality is that these safe harbor IRAs often charge fees that are disproportionate to the small balances that are being rolled over from former employers. Assuming the accounts are truly forgotten--or that the former employee simply isn't paying attention, those fees often erode the balance when they're left in the safe harbor plan. Often, this is done without any knowledge on the former employee's part. Employers are in the best position to help employees understand their options as they're leaving employment.
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Byrnes: 401(k)s are offered as an employment benefit--to attract and retain employees. Once an employee has left employment, they should be required to take their savings to a new 401(k) or establish an IRA of their own—it should no longer be the employer's obligation. There's no reason why we shouldn't allow employers to offload small-balance accounts into safe harbor IRA plans.
Bloink: Safe harbor IRAs are notorious for producing low returns--meaning that the returns generated by these small-balance accounts aren't offsetting the fees being charged. We've also recently increased the threshold for what constitutes a "small balance"--allowing employers to force left-behind 401(k)s with balances of less than $7,000 into safe harbor IRAs.
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Byrnes: "Forgotten" small-balance accounts create a huge administrative headache for employers. In the end, requiring the employer to manage accounts of former employees could tip the scales in favor of not offering any retirement savings option at all—a situation that we don't want when we're trying to encourage employers to provide retirement savings options.
Bloink: If we want to continue to allow employers to force out small-balance accounts left by former employees, we have to do so in a more responsible way. There's no reason we can't require employers to ensure fees are reasonable and investments are geared toward increasing returns over time. This should be part of the employer's responsibility as plan sponsor.