I’ve seen lots of headlines in the last couple of weeks about a new GAO report, “Labor and IRS Could Improve the Rollover Process for Participants”. Media outlets and industry groups have latched on to different findings in the report, and resulting headlines vary from the humdrum (“GAO Advises Easing Rollovers Between 401(k) Plans”) to the conspiratorial (“Firms Mislead Workers on 401(k) Rollovers: GAO”).
Bottom line, what seems to concern the GAO is that so much 401(k) money is flowing into IRAs. From reading the report and its summary, I sense a bias from the authors that qualified money is better off in the 401(k) environment than in the IRA environment. I’m not sure where this bias is coming from. After all, wasn’t it just a couple of years ago that the Department of Labor issued regulations to require disclosure of 401(k) fees because “the cumulative effect of the [401(k) plan] fees and expenses on your retirement savings can be substantial.[i]”?
I don’t think the GAO made a very clear argument about why it’s important to keep 401(k) money in 401(k) plans rather than move it to IRAs. Don’t get me wrong, IRAs and 401(k)s are not completely interchangeable. The relative benefit of the 401(k) plan varies depending on the individual’s circumstances. There’s some insinuation that custodians are making more money off of IRAs than 401(k)s, which is probably true in some cases. And of course, a custodian would much rather keep the money “in house” in an IRA than have it move to a new employer’s 401(k). But that doesn’t necessarily mean the employee is best served by a 401(k) to 401(k) transfer.
I frequently see the 401(k) rollover as a way for institutions to get customers in the door (just search for “401(k) rollover” and you’ll see what I mean). Some discount brokers offer “bonuses” for sizeable 401(k) account rollovers, designed to attract accounts from one custodian or fund family to another. But this GAO report focuses on the existing 401(k) custodian providing incomplete information to employees, and tilting their recommendation towards that same institution’s IRA instead of the existing 401(k) plan or the new employer’s 401(k) plan. In many cases, the call center rep tells the employee that the IRA is a better choice than keeping the money in the existing 401(k). Why? Because the IRA opens up the “realms of investment opportunities” by not limiting the choices to those offered by the employer plan. And, the custodian can offer advice via an IRA that isn’t available through 401(k) plan due to 401(k) plan fiduciary requirements. Finally, some potential rollover candidates are told that the costs of the IRA will be lower than those of the 401(k).
Of the three IRA “benefits” listed above and used by the custodians, let’s be clear: the first two are true benefits. But once again the issue of fees comes up. And once again there is no single, “one size fits all” answer. Not all 401(k)s are cheaper than IRAs; not all 401(k)s are alike. Some employers who subsidize 401(k) management fees for current employees pass along an expense charge to former employees. Other 401(k) plans offer “institutional pricing” on mutual funds, which is cheaper than what is available in an IRA. You just can’t know without understanding the fees charged on each of these accounts.
Calls to action from the GAO report focus on two areas:
- Requiring disclosure of all options available to separating employees regarding their 401(k) plans, including pros and cons of each option; and
- Simplifying and streamlining the 401(k) plan-to-plan rollover process to make it less cumbersome.
What wasn’t in the proposal? A requirement that IRA fees be clearly disclosed in the process of a rollover, even though the GAO found that IRA plan fee information was sometimes misrepresented by call center personnel. Cost information can be provided without understanding each employee’s circumstances. What you as an employee need to take away from this report is that before deciding what to do with your 401(k) rollover, understand each alternative. With the cost information in hand, you can then review other pros and cons of each option to decide how to move forward.
If you’re not comfortable going it alone, an independent financial advisor can help you determine your best move. If you’re considering a rollover and want a second opinion, call us to set up an appointment.