Abandonment Issues

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 Under the new rules (since rescinded), shareholders were required to cash their dividend checks or correspond in writing with their custodial institution if they were to be considered "active."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.