GAO is on target in rollover report

APR 07, 2013
By  MFXFeeder
When workers participating in 401(k) plans switch jobs, they have the option of rolling over the money that they have saved into individual retirement accounts. But that isn't their only choice. Sadly, in many cases, it is the only one being explained to them. In a report released last week, the Government Accountability Office found that when asked for assistance, 401(k) retirement plan providers too often steer workers into IRA accounts without explaining their alternatives. In many cases, these new IRA accounts are managed by the same firm that was managing the old 401(k) plan, ensuring the continuation of fee income. Although opening an IRA might be the best course of action for many investors, there are at least three other options, according to the GAO. They include leaving the funds in their former employer's plan, rolling over the funds into a new employer's plan and cashing out. Yet when undercover investigators hired by the GAO called 30 of the largest 401(k) providers posing as plan participants, 11 of them touted an IRA rollover without having any knowledge of the caller's financial circumstances. In addition, 12 raised doubts about the caller's ability to roll over his funds into a new employer's plan and seven incorrectly said there are no fees required to open or maintain IRAs. Such evidence helps explain why 401(k) rollovers are the largest source of contributions to IRAs. In 2008, for example, 95% of the money contributed to IRAs came from rollovers, the report stated. The GAO also criticized the current process by which funds are rolled into a new employer's plan, citing long waiting periods, complex verification procedures to ensure savings are tax-qualified, and a wide variance in the amount of paperwork required. Taken together, these factors help make IRA rollovers an easier and faster choice.

ROLLOVER IMPROVEMENTS

The GAO made several recommendations to the Labor Department and Internal Revenue Service to improve the rollover process and to make sure that investors have information before they make decisions on their 401(k) funds. All these recommendations should be implemented. Among the most important of these is for the Labor Department to proceed with finalizing a rule that would clarify the scope of retirement plan professionals defined as fiduciaries. The rule originally was proposed in 2010 but withdrawn amid industry backlash. Some brokerage groups have warned that if the rule applied to brokers selling IRAs, they would flee that market because of liability concerns. But in a letter accompanying the GAO report, Assistant Labor Secretary Phyllis Borzi made it clear that she is pressing ahead and will re-propose the rule — as she should. “We believe our work regarding the definition of "fiduciary' is key to addressing the conflicted investment advice and related problems your report identifies,” she wrote. Another important recommendation from the GAO is that the Labor Department should develop a concise written summary explaining a plan participant's four distribution options and list key factors comparing possible investments. A plan sponsor should be required to provide the summary to a participant who is leaving the employer. The GAO has done a good job of identifying the problems surrounding 401(k) plan rollovers and suggesting fixes. Now it is up to other federal agencies to put the rules and policies in place.

Latest News

Judge OKs more than $90 million in settlement money for GWG investors
Judge OKs more than $90 million in settlement money for GWG investors

Mayer Brown, GWG's law firm, agreed to pay $30 million to resolve conflict of interest claims.

Fintech bytes: Orion and eMoney add new planning, investment tools for RIAs
Fintech bytes: Orion and eMoney add new planning, investment tools for RIAs

Orion adds new model portfolios and SMAs under expanded JPMorgan tie-up, while eMoney boosts its planning software capabilities.

Retirement uncertainty cuts across generations: Transamerica
Retirement uncertainty cuts across generations: Transamerica

National survey of workers exposes widespread retirement planning challenges for Gen Z, Millennials, Gen X, and Boomers.

Does a merger or acquisition make sense for your firm? Why now is the perfect time to secure your firm’s future
Does a merger or acquisition make sense for your firm? Why now is the perfect time to secure your firm’s future

While the choice for advisors to "die at their desks" might been wise once upon a time, higher acquisition multiples and innovations in deal structures have created more immediate M&A opportunities.

Raymond James continues recruitment run with UBS, Morgan Stanley teams
Raymond James continues recruitment run with UBS, Morgan Stanley teams

A father-son pair has joined the firm's independent arm in Utah, while a quartet of planning advisors strengthen its employee channel in Louisiana.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.

SPONSORED Beyond the dashboard: Making wealth tech human

How intelliflo aims to solve advisors' top tech headaches—without sacrificing the personal touch clients crave