Defined contribution (DC) retirement plan participants in the United States face significant challenges after they change jobs, including not receiving effective rollover communications from either their new or old plan sponsors, according to a report from the Government Accountability Office (GAO).
This leaves job seekers vulnerable to unforeseen tax consequences that can result in a loss of retirement savings, according to GAO researchers.
“When participants leave savings in a plan after separating from a job, the onus is on them to update former employers with their new address and to respond to their former employer’s communications,” GAO explains. “We found that although an employer may incur costs searching for separated participants, there are no standard practices for the frequency or method of conducting searches.”
GAO reports that from 2004 through 2013, over 25 million participants in workplace plans separated from an employer and left at least one retirement account behind, despite efforts of sponsors and regulators to help participants manage their accounts.
“Department of Labor [DOL] officials told GAO that some sponsors do not search for participants when disclosures are returned as undeliverable,” the report notes. “DOL has issued guidance on searching for missing participants for some plans that are terminating, but guidance does not exist on what actions DOL expects ongoing plan sponsors to take to keep track of separated participants. A key element of DOL’s mission is to protect the benefits of workers and families. However, without guidance on how to search for separated participants who leave behind retirement accounts, sponsors may choose to do little more than remove unclaimed accounts from the plan when possible, and workers may never recover these savings.”
The GAO recommended that the Internal Revenue Service (IRS) Commissioner should consider revising the letter forwarding program in a cost-effective manner to again provide information on behalf of plan sponsors on unclaimed retirement accounts to participants. The IRS stopped its letter-forwarding program in 2012, and the Social Security Administration stopped forwarding letters in 2014.
Related to these challenges at home, the GAO report zeros in on a unique issue facing the sizable number of “U.S. individuals who participate in foreign workplace retirement plans.” This group faces unique challenges in reporting their retirement savings for tax purposes because of complex federal requirements governing the taxation of foreign retirement accounts and a lack of clear guidance on how to report these savings.
As the report lays out, stakeholders told GAO it is not always clear to U.S individuals or their tax preparers how foreign workplace retirement plans should be reported to the Internal Revenue Service (IRS).
“The process for determining this can be complex, time-consuming, and costly,” GAO warns. “In the absence of clear guidance on how to correctly report these savings, U.S. individuals who participate in these plans may continue to run the risk of filing incorrect returns. Further, U.S. individuals in foreign retirement plans also face problems transferring retirement savings when they switch jobs.”
As GAO explains, in the United States, transfers of retirement savings from one qualified plan to another are generally exempt from taxation. However, foreign plans are generally not tax-qualified under the Internal Revenue Code, according to IRS officials, and such transfers could have tax consequences for U.S. individuals participating in foreign retirement plans.
“Officials from the Department of the Treasury told GAO that a change to the U.S. tax code could improve the tax treatment of transfers between foreign retirement plans that Treasury has already examined,” the report says. “Without action to address this issue, U.S. individuals may not consolidate their foreign retirement accounts or may have to pay higher U.S. taxes on transfers than taxpayers participating in qualified plans in the United States, threatening the ability of U.S. individuals to save for retirement abroad.”
Considering these issues together, GAO recommends Congress “consider addressing taxation issues affecting the transfer of retirement assets between plans within the same foreign country.” GAO is making seven recommendations, laid out in full in the report, including that DOL issue guidance to help ongoing plan sponsors search for separated participants, and that IRS issue guidance to clarify how U.S. individuals should report foreign retirement savings to the IRS.
According to GAO, the agencies generally agreed with its recommendations, with some minor disagreements. However, it remains unclear whether any correction action may be forthcoming. The full report is available for download here.