GAO is on target in rollover report

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 The rule originally was proposed in 2010 but withdrawn amid industry backlash.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.