GAO: Workers hurt when rolling over 401(k) plans to IRAs

Agency calls for DOL and IRS to standardize rollovers, finalize fiduciary rule

Apr 3, 2013 @ 3:38 pm

By Mark Schoeff Jr.

defined contribution, 401(k), GAO, Labor Department, IRS
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Financial companies are encouraging U.S. workers to roll defined-contribution retirement plans such as 401(k)s into individual retirement accounts despite the fact that such rollovers might not be the best move for them, the investigative arm of Congress said today.

Rollovers into IRAs can be lucrative for financial companies that run 401(k)s. As part of a study, Government Accountability Office personnel called 30 of the largest 401(k) service providers, posing as plan participants. They often received sales pitches for IRAs.

“GAO found that service providers’ call center representatives encouraged rolling 401(k) plan savings into an IRA even with only minimal knowledge of a caller’s financial situation,” the report said. The Labor Department’s current requirements “do not sufficiently assist participants in understanding the financial interests that service providers may have in participants’ distribution and investment decisions.”

The GAO recommended that the Labor Department and Internal Revenue Service take steps to standardize plan rollovers and make them more efficient. Also recommended is providing information to plan participants about their options — in the form of a summary written in plain English.

“Such actions could help make staying in the 401(k) plan environment a more viable option, allowing participants to make distribution decision based on their financial circumstances rather than on convenience,” the report states.

“This report lends credence to the notion that this is an area that demands regulatory attention,” said Barbara Roper, director of investor protection at the Consumer Federation of America.

According to the report, some of the trouble spots for rollovers include waiting periods to roll into a new employer plan, complex verification procedures, big divergences in paperwork and inefficient practices for processing rollovers.

The GAO also recommended that DOL finalize a rule that would expand the scope of investment professionals that fall under the definition of “fiduciary” for retirement plans. The rule, which was first proposed in 2010 but then withdrawn amid fierce industry backlash, is expected to be re-proposed this summer.

“We believe our work regarding the definition of fiduciary is key to addressing conflicted investment advice and related problems your report identifies,” Assistant Labor Secretary Phyllis Borzi wrote in a Feb. 20 letter that accompanied the report.

A lawyer who represents 401(k) plan services providers and sponsors cautioned that applying a fiduciary duty to brokers who sell IRAs could force them out of the market and leave investors without guidance.

“We’re not trying to tilt the playing field,” said Kent Mason, a partner at Davis & Harman LLP. “The objective is to provide the best information possible so that participants can make the best decision. But if there is fiduciary liability associated with the provision of information to participants, that information will dry up, which is exactly the opposite of what the GAO is recommending.”

Workers who have a 401(k) sponsored by their employer and leave the company can let their money remain in the plan, roll it over to a plan sponsored by their new employer, roll it over into an IRA or take a lump-sum distribution.

In 2008, about 95% of money contributed to IRAs came from 401(k) rollovers, according to the Investment Company Institute. In the third quarter of 2012, $3.5 trillion was held in 401(k) plans and $5.3 trillion in IRAs. In 2010, companies sponsored more than 510,000 401(k) plans that involved 60 million employees, according to the Department of Labor.

The GAO cautioned that the study’s methodology didn’t allow it to “fully assess the quality or reliability of the survey data.”

Readers “should be cautious in drawing conclusions about how the population of individuals eligible to roll over would act,” the report stated.

The GAO study was requested by Sen. Tom Harkin, D-Iowa, chairman of the Senate Health Education Labor and Pensions Committee; Sen. Bill Nelson, D-Florida, chairman of the Senate Aging Committee; and Rep. George Miller, D-Calif., ranking member of the House Education and Workforce Committee.

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