If local mutual-fund giant Vanguard doesn't like a new Pennsylvania law on retirement accounts, will the state reverse it?
We're about to find out.
The law, which took effect Saturday, allows Pennsylvania to seize some retirement accounts three years after they're presumed abandoned - regardless of the account owner's age.
Previously, the state waited until individuals reached age 701/2 before seizing retirement accounts and liquidating the portfolios. Now, older folks and famously contact-averse millennials could be affected.
Valley Forge-based Vanguard, with more than $3 trillion in assets, isn't happy about the state's budget-inspired change and plans to join forces with others in the financial industry to repeal the law next year.
House Bill 1605, signed into law July 13, says financial institutions must notify the owner prior to seizing an account. But how and when is complicated.
"Although not previously required, Vanguard has long had a process in place to provide courtesy notices. In addition, for many years, we have had a team and processes in place that use various outreach methods, public databases, and other means to attempt to locate owners well before property is required to be turned over to Pennsylvania," spokesman John Woerth said.
Under the old rules, once a person reached Required Minimum Distribution (RMD) age, currently 70 years and six months, it triggered the beginning of a "dormancy period" for retirement accounts.
With the new law, the RMD trigger has been replaced with a "lost contact" trigger - a change that has two distinct elements, Woerth said.
For those retirement-account owners who ask for communication by regular mail, the date a piece of mail is returned as undeliverable is the date of lost contact, he said.
But "someone in their 20s or 30s, who knows where his retirement account is but fails to check in on it regularly and who the Postal Service doesn't deliver mail to, could have his retirement assets turned over to the state three years after mail is returned to Vanguard," Woerth explained.
"Some industry groups are asking for a change in Pennsylvania's law in 2017, and, while we are first seeking additional clarification from state officials, we are considering joining that effort," he said.
For those who opt to communicate electronically, the "lost contact" trigger is also different now. Firms such as Vanguard are now required to track "indications of interest" - meaning any activity - in the retirement account.
If there has been no indication of interest in a retirement account for two years, the firm must reach out to the owner - first by email and then, if there is no response, by regular mail.
"Again, for someone who isn't actively monitoring his or her account, and isn't expecting to, and doesn't receive mail deliveries by the U.S. Postal Service, that could mean that his or her retirement account is to be turned over to the state years - and even decades - before he or she ever even thought about taking distributions," Woerth said.
Vanguard does not support removal of age 70½ from the state law, as it considerably broadens the universe of retirement accounts vulnerable to "escheatment," or confiscation by the Commonwealth of Pennsylvania.
Retirement accounts are long-term affairs, and many investors don't even look at them, let alone do active transactions, especially with roll-over IRAs.
Vanguard recommends protecting your assets from being turned over to the state as unclaimed property by taking the following steps:
Make sure all of your financial institutions have your current address, especially if you have recently moved.
Inventory your current accounts, noting the financial institution at which each of them is held. If you have multiple accounts at multiple financial institutions, consider consolidating them.
Most important, periodically contact your account providers - via phone, email, or letter, or by logging on to your account online at least once a year. That contact should be sufficient in Pennsylvania to prevent your assets from being turned over as unclaimed property.
"We're not aware of any other state that has eliminated the 701/2-year-old age," said Tami Salmon, associate general counsel for the Investment Company Institute (ICI). "This is an asset grab by the state."
Christopher B. Craig, treasury chief counsel for Pennsylvania, disputed that.
"These statutory changes were not made in an effort to grab funds to balance the Commonwealth budget, as claimed by ICI," Craig said in a statement.
"Rather, they were enacted to provide greater clarity as to the responsibility of holders to maintain contact with account owners and to protect the interest of account beneficiaries," he said. "ICI fails to acknowledge that the holder notice requirements are consistent with . . . similar standards on brokers, dealers and investment managers when handling lost account owners."
Additional comments from the state treasurer:
The article doesn’t provide any context about unclaimed property -- in fact it doesn’t even use the term. There is no description of what unclaimed property is or why the state is involved in the first place. Instead the article focuses on the state efforts to “seize” or “confiscate” retirement accounts. Without context, that is an extremely charged accusation. The fact is the state does neither. Under unclaimed property laws holders of dormant accounts are required to report property to the state. This is done to help ensure there is a process in place to return the property to its rightful owners. Property owners or their heirs may claim the value of their property in perpetuity.
The new law was not a “budget-inspired change” as stated in your article. Pennsylvania’s annual general fund budget was approximately $32 billion for the current fiscal year. The total amount of unclaimed property funds used for general government operations for the prior fiscal year was less than 0.77 percent of that amount.
The change was written with the support of the Pennsylvania Bankers’ Association to provide greater clarity on how account administrators should maintain contact with account owners and to protect the interest of account beneficiaries. It is worth noting that the new holder notice requirements are consistent with SEC rules, which imposes similar standards on brokers, dealers and investment managers when handling lost account owners.
The fact is this change is in line with the original purpose of unclaimed property laws -- to protect consumers by creating a mechanism for reuniting them with property that may have been abandoned, lost or that they are unaware they own. In this case, the law was changed to protect consumers by ensuring surviving beneficiaries are made aware of and have access to funds that they may not know they are entitled to.
Before the change, account administrators were not required to attempt to reach out to account owners or their beneficiaries and an account would remain abandoned, incurring maintenance and management costs until the mandatory distribution age, at which point it becomes reportable. Now account administrators must proactively attempt to locate and contact account owners and they can no longer hold and access fees (in some cases for many years) to an account in which the owner has died and beneficiaries have not accessed the account because they are unaware of its existence.
Pennsylvania’s Unclaimed Property Law is one of the oldest consumer protection statues in the nation and as the Commonwealth’s administrator of the law, our priority is protect the interests of owners of lost and abandoned property. PA Treasury takes it responsibilities seriously and proactively seeks to find property owners through advertising, maintaining on an online database and proactively reaching out to owners. Last year PA Treasury returned $160 million in unclaimed property to its rightful owners.
It is unfortunate that ICI has elected to pursue a media relations strategy that mischaracterizes the law change and the reasons behind it. It is also disappointing that you didn’t reach out to us so that we may have provided necessary context that would have allowed a more balance view of the law change and could have better informed retirement savers and the general public."
The full text of H.B. 1605 isat www.legis.state.pa.us.