401(k) rollover study triggers call for action

A new Government Accountability Office report highlighting the pitfalls of rolling over 401(k) plan accounts is sparking demand for clearer procedures and stronger consumer protections from companies and the federal government.

The problems highlighted in the report are boosting efforts by the Labor Department to develop a tougher fiduciary standard.

“We think (the GAO report) clearly shows a need for a strong fiduciary rule,” said Nancy Hwa, spokeswoman for the Pension Rights Center, Washington. “The opportunity right now is there for a lot of abuse.”

The issue of 401(k) rollovers “is getting attention, and it seems that several forces are aligning to address this,” said Alison Borland, retirement strategy leader for Aon Hewitt in Lincolnshire, Ill.

Along with inefficient rollover processes and heavy marketing of individual retirement accounts, GAO investigators found instances of consumers being given misleading or even false information about the options and fees involved in rolling over 401(k) assets when leaving an employer.

“The bottom line is that we think a lot of people are making big decisions not on a sound financial basis but on what's easy,” Charles Jeszeck, GAO's director of education, workforce and income security, said in an interview. “A lot of plans want to discourage separating employees from leaving their money with them, new employers don't always want to accept it, and then, in between, you've got vigorous marketing efforts of IRA providers.”

While employers have been reluctant to provide more guidance, IRA providers have seized the opportunity to market the ease of their products. GAO officials estimate as much as 90% of an estimated $5.1 trillion in IRA assets comes from 401(k) participants changing or leaving jobs.

“Years ago we saw that sponsors were less comfortable (about dealing with rollovers) and started to allow (IRA) providers to have access,” said Amy Reynolds, partner and leader of Mercer's defined contribution practice in Richmond, Va. “Participants didn't understand the options available to them.”

The lack of attention to rollovers prompted congressional pension overseers to request the GAO investigation, which included a survey of industry practices and undercover calls to 401(k) plan service providers to see what kind of information plan participants were getting.

The resulting report was “a wake-up call” for stronger consumer protections, said Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin, D-Iowa. He and Sen. Bill Nelson, D-Fla., and Rep. George Miller, D-Calif., and ranking member of the House Education and the Workforce Committee, prompted the inquiry.

The GAO's work showed “the financial services industry spends substantial time and effort into marketing IRAs that may not be in the best interests of accountholders,” Mr. Miller said in a statement about the report released to the requesters on March 7 and made public on April 3.

Keeping assets in 401(k) accounts — which are generally considered better than IRAs when it comes to fees, access to advice and fiduciary oversight — would help participants make decisions based more on financial circumstances and less on convenience, GAO officials said.

To reduce the obstacles to plan-to-plan rollovers, GAO officials recommended several actions by the Labor Department and the Internal Revenue Service to enhance disclosure from retirement service providers and simplify rollover procedures:

• Review the lack of standardization of procedures for plan-to-plan rollovers, and reduce obstacles;


• Develop standard guidance for participants about distribution options for 401(k) plan savings when separating from an employer;


• Clarify the guidance for plan sponsors when accepting rollovers that are later deemed to be not qualified, and for reducing processing delays; and


• Revise IRS rules to allow for direct distribution of rollover checks to new plans.

In their preliminary responses to the GAO report, officials at the departments of Labor and Treasury said efforts to simplify and standardize the rollover process for participants and plan sponsors are underway, such as direct rollover distributions and clearer guidance for plan sponsors worried about unqualified plan assets.

Kathryn Ricard, vice president of retirement policy with the ERISA Industry Committee in Washington, which represents corporations on benefits issues, said any new disclosure would have to be carefully crafted to be useful.

“Participants get a lot of paperwork, so we'd want to know if it is a different kind of disclosure,” Ms. Ricard said. She added that plan sponsors have to be careful “not to step over the line” when helping participants make rollover decisions.

One of the biggest steps is updating a 37-year-old fiduciary standard that was developed in a very different marketplace, said Phyllis C. Borzi, assistant secretary of labor for the Employee Benefits Security Administration. “We believe our work regarding the definition of fiduciary is key to addressing conflicted investment advice and related problems your report identifies,” Ms. Borzi said in a letter to the GAO. She declined further comment.

That has some retirement industry officials braced for bad news as the Labor Department tries to finish its controversial fiduciary rule update, which was sent back to the drawing board last year over industry protests and is now expected in July.

“We're open to discussing better transparency,” Brian H. Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, Arlington, Va., said in an interview. “But we would not support anything that would not allow participants to continue to work with plan advisers and providers that they've grown to trust.”

Plan participants facing rollover decisions should be protected by the fiduciary rule, said Ed Ferrigno, vice president of Washington affairs for the Plan Sponsor Council of America. “We think it clearly applies to this kind of advice, if (service providers) are making recommendations about what they should do. The bottom line is that today, 99% of people can absolutely disregard the fiduciary rule.”

Addressing sponsors' fiduciary risk “would be helpful,” said Ms. Reynolds of Mercer. “If we can clarify that for them ... it'd be in the best interests of participants for sponsors to be able to communicate. Sponsors are starting to get more comfortable and it gives them buying power. I am seeing them wanting to do more to keep assets in the plans, and something pointed from Washington would help encourage more active thinking.”

Some industry participants are not waiting for Washington to act. “I'm convinced that the industry is in the process of solving (what was) a glaring gap in the tool kit of the retirement industry,” said J. Spencer Williams, CEO of The Retirement Clearinghouse LLC, Charlotte, N.C., which works with plan sponsors and service providers to facilitate rollovers to a new employer's plan, or what he calls “roll ins.”

“It is in plan sponsors' interest to encourage new hires to roll in. You get a healthier plan with larger average account balances.”

Lew Minsky, executive director of the Defined Contribution Institutional Investment Association, which represents the range of industry participants from plan sponsors to investment managers to record keepers, agreed. “There is a lot that can be done behind the scenes to make it easier.”

“I think we've made a lot of progress” on making the documentation process less cumbersome,” said Mr. Minsky, who works in Jupiter, Fla. “The next big step is to build consensus and really fix some of the architecture in the system, and to address leakage. If we can do something to make it easier for participants to keep their money in the system, that's really big.”