Mountains of paperwork make 401(k) transfers a tough hill to climb

Moving money from one record keeper to another so hard that some clients give up and stay put

Apr 10, 2014 @ 10:55 am

By Darla Mercado

Retirement plan advisers are struggling to help workers roll 401(k) assets into a new 401(k) plan when they change jobs, as record keepers load the process with so much red tape that it's easier to move into individual retirement accounts.

“The paperwork is fairly convoluted,” said Corby Dall, president of 401(k) Advisors Intermountain. “[Providers] hope that people will throw their hands up in frustration and leave their money there.”

Moving assets from one employer to another, in theory, should be intuitive. The transfer ought to take place between the plans and their record keepers so the individual worker doesn't have to worry about receiving a paper check, or about rolling it over within 60 days of receipt, per Internal Revenue Service rules.

(Don't miss: Navigating 401(k) rollovers)

Mr. Dall has experienced the heavy paperwork issue firsthand. One of his plan clients is a group of lawyers. At one point, the attorneys had an opportunity to move to a new law firm and its retirement plan. Throughout the change, the discussion with the old record keeper was frustrating enough that a handful of the lawyers gave up and left their assets with the old retirement plan.

“That's my biggest pet peeve,” Mr. Dall said. “These [call center personnel at record keepers] are trained assassins on the phone; they try to talk people into leaving their assets where they are, even if it's their wish to move.”

There is evidence of just how 401(k) assets can get stuck at an old retirement plan or wind up routed to an IRA rollover at the old record keeper, too. The Government Accountability Office last year released a report showing that service providers have used distribution information for employees as a platform to tout rollovers into retail IRAs, “[emphasizing] the simplicity of rolling over to the service providers' IRAs, as opposed to the relative complexity of other providers' IRAs, and added flexibility regarding distributions and beneficiaries.”

The major record keepers his firm works with do educate employees on their distribution options, said John Geli, chief executive of Wealth Management Systems Inc., which works with record keepers to provide employees with information on rollover options, and provides technology to facilitate plan-to-plan rollovers between record keepers.

Mr. Geli notes that firms still run into difficulties with moving money from one record keeper to another.

(See also: Regulators compete for slice of IRA rollover pie)

“There are two components in a plan-to-plan transfer: What's the paperwork required to get the assets into the new plan, and does the new plan accept rollover assets?” said Mr. Geli. He added that the record keeper that's rolling money out of an old plan doesn't necessarily know how to get the money into the record keeper overseeing the new plan — and vice versa.

“Some work can be done in the industry to make the process easier,” said Mr. Geli. “Potentially, we might want to think about an industry option where there is a standard rollover 'in' form and a standard rollover 'out' form so that everyone operates under the same rules.”

Service providers' promotion of the IRA rollover as the optimal distribution choice isn't the only obstacle in the way of a smooth plan-to-plan 401(k) transfer. Legal disclosures can make the paperwork that departing employees receive dozens of pages long. Additionally, some providers may require trustees or custodians to sign off on a transfer of plan assets from one 401(k) to another.

Further, plan sponsors worry about new money coming in from an old retirement plan: They want to ensure that the old retirement plan still has its qualified status with the Labor Department and IRS. “If the old plan was violating the rules and the recipient plan receives the 'bad' money, then it could hurt that plan's qualified status,” Brian Graff, executive director and chief executive of the National Association of Plan Advisors, noted during a press meeting at the group's annual summit in March.

Advisers who are acting as fiduciaries to 401(k)s are essentially forbidden from providing rollover advice to departing employees. Even those who aren't fiduciaries are facing scrutiny on rollover activity from the Labor Department, the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc.

So what's an adviser or broker working with a 401(k) to do? Educate employees on what their options might be, and make them aware that even if the record keeper points them to an IRA rollover, there are other choices.

“Advisers who service plans on an ongoing basis are different from those call centers at the service providers,” said Richard Schwamb, senior financial adviser at the Schwamb O'Day Group of Bank of America Merrill Lynch. “We do the right thing in telling them all of the different options they have available: whether it's staying in the plan, rolling into another plan or an IRA.”

Plan advisers can also make themselves a valuable asset to workers by helping employees understand their rollover paperwork, particularly if they're transferring assets from one plan to another. Mr. Schwamb noted that plan sponsors and workers need to know that the adviser — and not necessarily the record keeper's call center — can be a good source of information.

“There are several points to consider: The employee and their money; the plan sponsor and their willingness to facilitate the employee accessing the money; the consideration of the vendor and how easy they can make the process; and the adviser and the guidance that's appropriate,” said Alan Spierer, senior vice president of investments and retirement plans consultant at UBS Institutional Consulting Group. “What is best for the individual employee?”


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