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 full text of H.B. 1605 isat www.legis.state.pa.us.