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Market Perspective Summary

  • Legislative Updates

Government Accountability Office (GAO) Report on Rollovers

April 15, 2013

The GAO released a report in early April concerning problems and pitfalls that workers face rolling over their 401(k) assets when leaving or changing jobs.

Key findings from GAO report:

  • Rolling over 401(k) assets to a new employer plan can be complex and inefficient, which makes an IRA rollover an easier, but not necessarily better, option.
    • Participants often encounter waiting periods to roll into a new employer plan, complex verification procedures to ensure savings are tax-qualified, wide divergences in plans’ paperwork and inefficient practices for processing rollovers.
  • It is difficult for participants to understand their distribution options: some employers try to discourage departing workers from leaving their assets in the plan, and some new employers are reluctant to accept rollovers by making the process difficult.
  • IRA fees are often opaque or difficult to understand.
  • Plan service providers tend to encourage participants to roll over to the provider’s IRAs when they terminate their employment, so they sometimes give inaccurate or misleading information.

 

Excerpt from undercover call from GAO to a service-provider representative:

Representative: “...it almost always makes sense to roll [the current 401(k)] into an IRA that has no fees, like a no-fee IRA, because basically, you know, even if you like the funds that are in your current 401(k), you can just buy those in your IRA. It’s the same thing. Most all of those funds are available retail…when you buy when you have them in an IRA, so you are not missing anything by rolling it over, but you are forfeiting some things by leaving it where it is.

 

When considering fees, access to advice and fiduciary oversight, it is generally better to keep assets in 401(k) accounts than transferring them into IRAs. The GAO report observes that making plan-to-plan rollovers more efficient could help make staying in the 401(k) plan environment a more viable option, which would help participants make better distribution decisions—based on financial circumstances instead of convenience.

GAO’s recommendations to government agencies include:

  • Review lack of standardization of plan sponsor practices regarding plan-to-plan rollovers and policies affecting former employees who leave their savings in the plan, and take appropriate action.
  • Communicate to plan sponsors that relief is available if a plan accepts rollovers from a plan that was later determined to be not tax-qualified.
  • Develop a concise written summary explaining a participant’s distribution options and key factors they should consider. Require plan sponsors to give that summary to participants when they leave the employer.
  • The Department of Labor (DOL) should finalize their regulation that clarifies the definition of fiduciary and require service providers to disclose their financial interests when assisting participants with rollovers.

Potential impact on DOL’s proposal to revise the definition of fiduciary:

  • The DOL is slated to release an update to its fiduciary rule in July 2013. It may address such issues as better transparency concerning rollover options, but it will also likely detail the fiduciary responsibilities of service providers when giving rollover recommendations to participants.
  • The new definition may also provide that a recommendation to withdraw from a 401(k) and roll to an IRA would be a fiduciary act.

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