The Current Issue: Automatic IRA Rollovers

Of critical importance to retirement plan sponsors are “Automatic IRA Rollovers.” Advisors may want to take this opportunity to be sure that their clients are: A) Aware of the impending deadlines related to this issue; and B) Working with an administrator and recordkeeper that have the ability to assist in the compliance process.

Under new rules, a distribution to an unresponsive terminated participant of more than $1,000 and not more than $5,000 must be transferred to an IRA. Historically, sponsors have simply issued checks for distributions of $5,000 or less to participants who failed to respond to distribution requests. Under the new rules, sponsors will need to execute the documentation necessary to establish the IRA account and determine how account assets are invested. While this may create an additional administrative burden, many vendors are striving to create IRA programs that will make the process as efficient as possible.

The Deadline

Before March 28, 2005, sponsors of retirement plans that include mandatory distributions must carefully consider the new regulations that will impact how these distributions are processed in the future. Any sponsor that forces distributions over $1,000 must amend their plans by the last day of the plan year ending after March 27, 2005. So, for example, a plan with a June 30 year-end will need to be amended by June 30th if the sponsor will continue to use mandatory distributions. A plan with a December 31 year-end has until December 31st to execute the amendment.

Advice for Plan Sponsors

Advisors of clients whose plans include mandatory distributions may want to suggest that they take a two-pronged approach to these new rules:

• First, process distributions of $5,000 or less before March 28th;
• Second, consider the implications of retaining mandatory distributions in the plan and the capabilities of the recordkeeper. If mandatory distributions are not viewed as an important aspect of the plan, the “path of least resistance” may be to simply remove these distributions from the plan document by the deadline described above to avoid the compliance complexities. If mandatory distributions are important to the plan sponsors, evaluate the capabilities of the recordkeeper. It is important to note that the actual purchase of these IRAs may be delayed until 2006 if the sponsor cannot find a suitable IRA provider this year.