The best investment vehicles are often those on autopilot. Open an account, schedule contributions and then forget about it for the next five to 30 years.
But in some parts of the country, that setup might mean an investor can forget about finding those assets where they left them after a few years.
States have been stepping up their tactics for having assets escheated—or turned over to the state—because of long periods of inactivity, not just because the whereabouts of their owners are not known.
In recent years, several states have changed the rules for classifying inactive accounts as "lost." Many have shortened the dormancy periods under which institutions are allowed to keep abandoned assets on the book (see chart inside). Others have implemented stricter notification requirements for custodial holders to warn customers that their assets are in jeopardy, or have increased the penalties for the failure to report escheatable property, with tougher auditing procedures that in some instances could last years.
In Delaware, the shareholder services industry was astonished by changes the state made in February to its guidelines for classifying unclaimed property. Under the new rules (since rescinded), shareholders were required to cash their dividend checks or correspond in writing with their custodial institution if they were to be considered "active." Never mind that most shareholders receive—and reinvest—dividends electronically, and have few if any reasons to correspond with a custodial institution, said Charles Rossi, president of the Securities Transfer Association of Hazlet, N.J. and an executive vice president at share registry firm Computershare.
"We could [have been] turning over to the state thousands of accounts of people who really aren't lost," argued Rossi.
State officials relented in May, removing the dividend check-cashing requirement from the new guidelines. Delaware will also refrain from counting an accountholder as lost until there are clear signs of absence, such as an undeliverable 1099 tax form returned in the mail.
It's not just customers who lose money in an escheatment. Banks lose the assets under management. And for every year by which the dormancy window gets narrowed, that's also one less year of inactivity fees that a bank can collect on a dormant account.
The earlier changes in Delaware and elsewhere have made it all the more complex to stay on top of the different rules and revisions across all states and territories.
"Our biggest challenge is getting the technology to keep pace with regulations that change so fast," says Susan Ferrara, corporate manager for U.S. Bank's abandoned properties management group in St. Louis. "We have to do a lot of manual effort."
In response to rapidly changing state regulations, banks and transfer agents are looking for ways to improve how they mine information about abandoned accounts and how they alert customers to escheatment threats.
Doing so could help head off the reputational risk that escheatment carries for financial institutions, which often are faulted by consumers for their role in what's really a government-mandated process.
"If a customer loses his money, he's not blaming the state. He's blaming the bank," says Michael Ryan, a senior vice president with New York-based unclaimed property consultancy Keane in New York.
Customer-service concerns are what drove McGraw-Hill Federal Credit Union in 2010 to shift its escheatment handling to Keane (which is not related to the similarly named IT consultancy in Boston).
The $286 million-asset McGraw-Hill FCU, based in East Windsor, N.J., serves employees of about 100 businesses in addition to namesake The McGraw-Hill Cos. Most of its membership is in New York, New Jersey and Pennsylvania. But it also has members in Texas and California.
Cathyann Frank, McGraw-Hill FCU's vice president of operations, says the credit union realized it didn't have the staff to handle "50 states having 50 different rules and 50 different ways they want the process" conducted.
If it's difficult for institutions to keep up, imagine what it's like for consumers, many of whom might not even be familiar with the term "escheatment."
While the threshold for keeping an account active is low—make a deposit, make a PIN-based transaction, write a check—Ryan says consumers often are surprised at what fails to constitute "activity" under some state statutes.
In Delaware, automatic dividend rollovers into investment accounts don't trip activity triggers. A phone call may not re-set the inactivity clock either.
"If I'm just checking my balance on a phone call, that's not activity. But if I say, 'Move 1,000 shares from savings to checking,' then while the phone call isn't activity, the transaction is," Ryan says. The hairsplitting can be especially tricky for homebound seniors or for overseas military personnel, who can't necessarily pop in for regular branch visits, and who are more likely to have nonactive investment and banking accounts.
For customers with multiple products from the same institution, the institution can help diffuse the likelihood that an account is determined to be inactive. If a customer's deposit, loan and investment accounts, for example, are properly linked, activity on just one of those accounts would be enough to protect any of them from being labeled dormant.
But not all banks have this kind of robustness built into their customer relationship management systems. That's why U.S. Bank, another Keane client, reviews the status of incoming accounts inherited through acquisitions, in search of potentially dormant accounts missed by the previous owner, says Ferrara.
At McGraw-Hill FCU, Keane used an escheatment review program to clear up any missing links, and to reach out to customers whose accounts hadn't shown any noticeable activity in at least three years. Frank says the exercise was worthwhile, as it helped get inactive customers engaged with the credit union again—and in many cases earned their gratitude for reminding them of a neglected account.
"We started making connections with individuals who said they had worked for McGraw-Hill for 30 years, and forgot all about that account," says Frank. "Many of them said, 'No, I don't want to close it. I'm going to send you some more money.'"
Explaining why states expanded escheatment programs has been a decade-long debate between critics and state administrators in charge of unclaimed property.
"It's probably hard to say with 50 different legislatures exactly what all they're motivations are," says Carolyn Atkinson, West Virginia's deputy treasurer for unclaimed property and the president of NAUPA, the National Association of Unclaimed Property Administrators. "But I'll also say it increases likelihood of returning property to its owner."
Critics, however, point out that escheated funds have become a significant source of revenue. They argue that states are motivated to adopt new escheatment rules that can add to their coffers, especially given the recent economic pressures on state government budgets.
While property rights belong to the owners in perpetuity, Keane reports that fewer than 20 percent of the owners of escheated assets are ever expected to come forward to reclaim abandoned assets. (In the case of securities, owners of escheated securities don't get the stocks returned—those are usually liquidated—but the owners are paid back the value of the stock at the time of the escheatment.)
"States have looked at this as a free and neglected source of revenue and have moved in aggressively, pursuing escheatable property for a long time," says Lance Jacobs, an attorney with Pepper Hamilton in Washington who has handled escheatment issues for banks and other firms.
The state of Delaware expects to collect $384 million in abandoned property, including bank accounts and unused gift cards, in fiscal 2012, representing slightly more than 10 percent of its $3.4 billion general fund. For 2013, the estimate for abandoned property collections is even higher, at $484 million.
Nationwide, more than $33 billion in unclaimed property funds are believed to be in states' hands, according to NAUPA. But that estimate is several years old (a new one is due out this year, Atkinson says) and it may underestimate what's in state coffers' today, not only because of the narrowed dormancy windows, but because of the new types of escheatable property some states are starting to collect.
New Jersey, for example, now requires retailers to collect the zip codes of consumers who purchase stored-value cards, so that unused funds on cards held by New Jersey residents can revert to the state. (The rule prompted American Express and gift-card issuer InComm to pull their card stocks out of New Jersey.)
Other changes made to the state's unclaimed property laws in 2010 reduced the dormancy period on travelers' checks from 15 years to three.
Sometimes, a state's gravy train can run off the rails. Abandoned property claims by California drew to a halt for most of 2008, after a spate of lawsuits filed against the state controller by owners of abandoned property led to a federal court injunction.
The suits alleged that state officials had turned escheatment into a confiscation racket, using the shorter dormancy periods passed by the legislature to heat up the search for escheatable property and bring more than $400 million in annual revenue to the state. (Probably not helping California's case was a decision in the 1980s to eliminate a state controller unit that actively sought out property owners).
California has since restarted its escheatment practices. It now has a website to help owners with lost property searches, and regularly publishes lists of missing property owners in newspaper ads. The state also has adopted some of the nation's strictest compliance laws against institutions holding unclaimed property.
While it's not unusual to require financial institutions and stock issuers to send letters to owners with accounts flagged for escheatment, California's regulations require each letter to include specific wording and formatting, even down to a required font size, says Keane's Ryan. "If you don't put that font on that letter, California won't absolve you of any liability" from a consumer lawsuit. The state also imposes a 12 percent penalty for each year escheatable property goes unreported.
New York, which holds $11 billion in unclaimed property, also introduced new customer notification requirements. Instead of a minimum of two mailed notices and a sequence of database searches, holders of lost assets belonging to New York residents send out certified mailings and advertise unclaimed property before it's eligible for escheatment.
If the impression is that banks and stock transfer agents would rather states leave well enough alone, the STA's Rossi argues that the industry will be supportive of changes to escheatment laws, so long as the measures are meant to reunite owners with their property. But he worries that the statutory changes in Delaware, for example, will do more to strip consumers of their accounts than to put assets back into the hands of their owners.
Unless the state decides to rework its new rules to recognize that shareholders don't have to physically cash checks to be considered active, Rossi says, "transfer agents are going to have to deal with inquiries that come in from holders who say, 'What are you talking about? I'm not lost. Why are you going to abandon me?'"
Glen Fest is the executive editor of American Banker Magazine.
