Learn the Essentials About Mandatory Distributions

What is a Mandatory Distribution?

ANSWER: "mandatory distribution" is generally synonymous with an Automatic Rollover or a Safe Harbor IRA. The term "mandatory distribution" generally refers to the process whereby separated participants with less than $7,000 can get forced out their plan, and the safe harbor IRA refers to the specialized individual retirement account (IRA) that's established when a participant of a qualified retirement savings plan is “forced out." Mandatory distributions do not apply to existing employee participants (any balance), or to former employees with balances greater than $7,000. Both of these groups are not subject to mandatory distributions, and can elect to stay in plan. Not all plans have mandatory distribution provisions to force out ex-employees with less than $7,000. Plans that elect to implement mandatory distribution programs often see a benefit in “cleaning up” their plan from a build-up of small-balance accounts. A proliferation of small balance accounts can cause administrative burdens (ex. – lost & missing participants, uncashed distribution checks, etc.) and increased plan costs.

History of Mandatory Distributions

• In 2001, the 107^th Congress of the United States passed EGTRRA, otherwise known as the Economic Growth Tax Relief Reconciliation Act. EGTRRA set forth rules dictating that employer-sponsored, qualified plans could make automatic, mandatory distributions to terminated employees without their consent for small balances (less than $5,000), provided that balances between $1,000 and $5,000 be automatically rolled over to a Safe Harbor IRA.
• In 2004, the Department of Labor (DOL) issued final rules describing the automatic rollover safe harbor for plan fiduciaries tasked with choosing mandatory distribution service providers, as well as the initial Safe Harbor IRA investments. The DOL’s rules applied to mandatory distributions made on or after March 28, 2005.
• In 2022, Section 304 of the SECURE 2.0 Act increased the mandatory distribution limit from $5,000 to $7,000, effective for distributions made after 12/31/23.

How Does the Mandatory Distribution Process Work?

• Plans that have adopted “mandatory distribution” provisions will typically select a services provider – which can be their current recordkeeper or a third-party mandatory distribution services provider (ex. – Retirement Clearinghouse).
• Periodically, plans will determine the participants who are eligible for mandatory distributions – specifically, those former employees who have balances less than $7,000. On behalf of the plan, the plan’s recordkeeper or mandatory distribution services provider will notify the eligible participants about the pending force out, providing them with the required disclosures, and giving them instructions and adequate time to take control of their situation prior to the mandatory distribution, or automatic rollover. This period of time is typically 30 to 60 days.
• If the participant takes no action, their retirement savings are automatically rolled over to a Safe Harbor IRA. At this point, the former plan sponsor’s fiduciary responsibility to their former participant is concluded, and the former participant is now a Safe Harbor IRA accountholder.
• Once in the new Safe Harbor IRA, the former participant’s savings are automatically invested in a default investment vehicle, designed to protect principal. The new Safe Harbor IRA accountholder is typically mailed a Welcome Kit, and is invited to take charge of their retirement savings in any manner they see fit.

Special Circumstances for Mandatory Distributions

• When a qualified defined contribution plan is terminated, all unresponsive participants – regardless of balance – can be considered part of a mandatory distribution program, and will be automatically rolled over and forced into a Safe Harbor IRA.

More Information on Mandatory Distributions

Mandatory Distributions

Related Terms

Safe Harbor IRA

Auto Rollover

Auto Rollover Program

Auto Rollover IRA

Automatic IRA Rollover

Retirement Clearinghouse’s Mandatory Distribution Services

We believe that the RCH automatic rollover service is clearly the best mandatory distribution service in the market today. RCH is the only provider proven to reduce cash outs, to offer former participants with a beneficial monthly fee structure, and with a proven track record of consolidating former participants’ retirement savings into an active retirement plan or existing IRA.

When considering a mandatory distribution program service provider, we encourage plan sponsors to consider the following criteria:

• Cashout rates: The percentage of participants eligible for mandatory distributions that cash out their retirement savings completely, prior to moving to a Safe Harbor IRA. RCH is the only provider proven to reduce cashouts rates by over 50%, vs. industry averages for automatic rollover balances (26% v. 55%).
• Commitment to account consolidation: RCH has a demonstrated commitment, ability and track record in consolidating retirement savings balances. Most mandatory distribution program service providers prefer that Safe Harbor IRAs stay on their books as long as possible, incurring ongoing fees and offering the provider with an asset management opportunity. RCH takes the opposite approach. We believe it’s best to move retirement savings forward to an active plan or to an existing IRA.
• A unique monthly fee structure: Because RCH actively seeks to consolidate Safe Harbor IRA assets with the account holders’ existing retirement accounts, RCH charges only for the time the account is open – a monthly fee – rather than an annual fee paid in advance. Using a monthly fee structure is highly-advantageous for short-term accountholders who are automatically rolled over to a Safe Harbor IRA.
• Progressive distribution fee structure: RCH employs an algorithm that lowers the distribution fee as the Safe Harbor IRA account falls below a threshold.
• Investment Choice: RCH offers over 30 different investment options in five different fund families from which to choose, should an accountholder wish to move their savings out of the default Safe Harbor IRA fund – with no transaction fees or lock up provisions on any investment options.
• Customer Service: The RCH Service Center is available to accountholders Monday – Friday, 8 a.m. to 7 p.m. Eastern Time, with bi-lingual support including multiple, full-time native Spanish-speaking representatives. RCH also provides a fully-functional web portal for customer access, account maintenance and self-service.
• Independence: RCH is independent, transparent and un-conflicted, with no hidden fees paid to third parties, and no lock-up provisions in our default investment funds.

Taken together, these attributes clearly establish the RCH automatic rollover service as the most fiduciary-friendly mandatory distribution program in the industry.