401(K) Plans:

Labor and IRS Could Improve the Rollover Process for Participants

GAO-13-30: Published: Mar 7, 2013. Publicly Released: Apr 3, 2013.

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Charles A. Jeszeck
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What GAO Found

The current rollover process favors distributions to individual retirement accounts (IRA). 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 make IRA rollovers an easier and faster choice, especially given that IRA providers often offer assistance to plan participants when they roll their savings into an IRA. The Department of Labor (Labor) and the Internal Revenue Service (IRS) provide oversight and guidance for this process generally and can take steps to make plan-to-plan rollovers more efficient, such as reducing the waiting period to roll over into a 401(k) plan and improving the asset verification process. Such actions could help make staying in the 401(k) plan environment a more viable option, allowing participants to make distribution decisions based on their financial circumstances rather than on convenience.

Plan participants often receive guidance and marketing favoring IRAs when seeking assistance regarding what to do with their 401(k) plan savings when they separate from their employers. GAO found that service providers' call center representatives encouraged rolling 401(k) plan savings into an IRA even with only minimal knowledge of a caller's financial situation. Participants may also interpret information about their plans' service providers' retail investment products contained in their plans' educational materials as suggestions to choose those products. Labor's current requirements do not sufficiently assist participants in understanding the financial interests that service providers may have in participants' distribution and investment decisions.

In addition to being subject to inefficient rollover processes and the marketing of IRAs, 401(k) plan participants separating from their employers may find it difficult to understand and compare all their distribution options. Information participants currently receive is either too generic and without detail, leaving participants without understanding of the key factors they need to know to make decisions about their savings, or too long and technical, leaving participants overwhelmed and confused. Labor regulations do not ensure that 401(k) plans provide complete and timely information to participants on all their distribution options. Industry experts told GAO that participants could benefit from simplified, concise, and standardized information.

Why GAO Did This Study

401(k) plan participants separating from their employers must decide what to do with their plan savings. Many roll over their plan savings to IRAs. As GAO previously reported, there is concern that participants may be encouraged to choose rollovers to IRAs in lieu of options that could be more in their interests. Because little attention has been paid to the distribution process, GAO was asked to identify challenges separating plan participants may face in (1) implementing rollovers; (2) obtaining clear information about which option to choose; and (3) understanding distribution options. To answer these questions, GAO reviewed relevant federal laws and regulations, interviewed federal officials and industry experts, conducted a nongeneralizable survey of plan sponsors, and made undercover calls to 401(k) plan service providers to determine what information is provided to plan participants.

What GAO Recommends

Among other things, GAO recommends that Labor and IRS should take certain steps to reduce obstacles and disincentives to planto- plan rollovers. Labor should also ensure that participants receive complete and timely information, including enhanced disclosures, about the distribution options for their 401(k) plan savings when separating from an employer. In response, Labor and Treasury generally agreed with the findings and will explore ways to implement these recommendations.

For more information, contact Charles Jeszeck at (202) 512-7215 or jeszeckc@gao.gov.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To help reduce obstacles and disincentives to keeping retirement savings in the 401(k) plan environment, the Commissioner of Internal Revenue and Secretary of Labor should review policies that affect separating employees leaving retirement savings in an employer's plan and, for those who choose to roll their distributions into another 401(k) plan, the process of plan-to-plan rollovers. As part of such a review, the Commissioner of Internal Revenue and the Secretary of Labor should review the lack of standardization of sponsor practices related to plan-to-plan rollovers and of policies affecting participants who leave plan savings in a former employer's plan, with the aim of taking any regulatory action they deem appropriate. Such action could address obstacles like sponsors refusing to accept rollovers from other plans, and disincentives like plans restricting participants' control over savings once they separate from the employer, and charging different fees for inactive participants.

    Agency Affected: Department of Labor

    Status: Open

    Comments: Labor generally agreed with recommendation, noting that it would evaluate whether it has available regulatory approaches to address the recommendation.

    Recommendation: To help reduce obstacles and disincentives to keeping retirement savings in the 401(k) plan environment, the Commissioner of Internal Revenue and Secretary of Labor should review policies that affect separating employees leaving retirement savings in an employer's plan and, for those who choose to roll their distributions into another 401(k) plan, the process of plan-to-plan rollovers. As part of such a review, the Commissioner of Internal Revenue and the Secretary of Labor should review the lack of standardization of sponsor practices related to plan-to-plan rollovers and of policies affecting participants who leave plan savings in a former employer's plan, with the aim of taking any regulatory action they deem appropriate. Such action could address obstacles like sponsors refusing to accept rollovers from other plans, and disincentives like plans restricting participants' control over savings once they separate from the employer, and charging different fees for inactive participants.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: Treasury believes that the agency and Labor can take steps to improve the rollover process so that more plan participants will be able to roll over retirement assets to their current employer's retirement plan and so that participants will be able to make such rollovers more easily. The agency described related actions the department has already taken. However, it reported that it is not aware of any statutory basis for imposing a requirement that plans accept rollovers. Our recommendation makes clear that Treasury and Labor should take action within each agency's purview.

    Recommendation: To help reduce obstacles and disincentives to keeping retirement savings in the 401(k) plan environment, the Commissioner of Internal Revenue and Secretary of Labor should review policies that affect separating employees leaving retirement savings in an employer's plan and, for those who choose to roll their distributions into another 401(k) plan, the process of plan-to-plan rollovers. As part of such a review, the Commissioner of Internal Revenue and the Secretary of Labor should work together to communicate to plan sponsors IRS's guidance on the relief from tax disqualification provided for plans that accept rollovers later determined to have come from a plan that was not tax qualified. In helping to better disseminate IRS's guidance to plan sponsors, Labor may also provide feedback to IRS to help ensure that the guidance is clear and understandable, so that it adequately addresses plan sponsors' concerns about their own plans' qualified status and helps reduce delays in processing rollovers from other plans.

    Agency Affected: Department of Labor

    Status: Open

    Comments: Labor questioned the appropriateness of being included in the recommendation inasmuch as the interpretation of the IRC's tax-qualification provisions related to acceptance of rollovers is not within Labor's jurisdiction. We agree with Labor that it should assist IRS in its outreach efforts and suggest ways that newly issued guidance could be more clearly communicated to plan sponsors: Labor's role should be more centered on communication and outreach to plan sponsors.

    Recommendation: To help reduce obstacles and disincentives to keeping retirement savings in the 401(k) plan environment, the Commissioner of Internal Revenue and Secretary of Labor should review policies that affect separating employees leaving retirement savings in an employer's plan and, for those who choose to roll their distributions into another 401(k) plan, the process of plan-to-plan rollovers. As part of such a review, the Commissioner of Internal Revenue and the Secretary of Labor should work together to communicate to plan sponsors IRS's guidance on the relief from tax disqualification provided for plans that accept rollovers later determined to have come from a plan that was not tax qualified. In helping to better disseminate IRS's guidance to plan sponsors, Labor may also provide feedback to IRS to help ensure that the guidance is clear and understandable, so that it adequately addresses plan sponsors' concerns about their own plans' qualified status and helps reduce delays in processing rollovers from other plans.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: Treasury generally agreed with this recommendation and noted that it will work to include our recommendation in its ongoing work to provide guidance facilitating rollovers into retirement plans.

    Recommendation: To help reduce obstacles and disincentives to keeping retirement savings in the 401(k) plan environment, the Commissioner of Internal Revenue and Secretary of Labor should review policies that affect separating employees leaving retirement savings in an employer's plan and, for those who choose to roll their distributions into another 401(k) plan, the process of plan-to-plan rollovers. As part of such a review, the Commissioner of Internal Revenue should revise rules that allow plans and providers to send direct-rollover distribution checks to individuals rather than to the receiving entities to which the checks are written.

    Agency Affected: Department of Labor

    Status: Open

    Comments: Labor generally agreed with this recommendation.

    Recommendation: To help reduce obstacles and disincentives to keeping retirement savings in the 401(k) plan environment, the Commissioner of Internal Revenue and Secretary of Labor should review policies that affect separating employees leaving retirement savings in an employer's plan and, for those who choose to roll their distributions into another 401(k) plan, the process of plan-to-plan rollovers. As part of such a review, the Commissioner of Internal Revenue should revise rules that allow plans and providers to send direct-rollover distribution checks to individuals rather than to the receiving entities to which the checks are written.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: Although Treasury generally agreed with the recommendations in this report, it did not provide comments on this particular recommendation.

    Recommendation: To help ensure that when plan participants separate from an employer and are deciding what to do with their retirement plan savings they receive adequate, timely, and balanced information, the Secretary of Labor should develop a concise written summary explaining a participant's four distribution options and listing key factors a participant should consider when comparing possible investments, and require sponsors to provide that summary to a participant upon separation from an employer. Should Labor conclude that additional statutory authority is needed to take this action, it should seek that authority from the Congress.

    Agency Affected: Department of Labor

    Status: Open

    Comments: Labor agreed with this recommendation, noting that it will address it recommendation by evaluating its regulatory approaches within the constraints of its existing statutory authority. While ERISA does not grant Labor specific authority to require plan sponsors to provide such information, it does grant Labor broad authority regarding protection of participant benefits and the duties of plan fiduciaries. GAO clarified this recommendation to indicate that should Labor conclude that additional statutory authority is needed, it should seek that authority from the Congress.

    Recommendation: To help ensure that when plan participants separate from an employer and are deciding what to do with their retirement plan savings they receive adequate, timely, and balanced information, the Secretary of Labor should finalize the agency's initiative to clarify the Employee Benefits Security Administration (ERISA) definition of fiduciary, and, in doing so, require plan service providers, when assisting participants with distribution options, to disclose any financial interests they may have in the outcome of those decisions in a clear, consistent, and prominent manner; the conditions under which they are subject to any regulatory standards (such as ERISA fiduciary standards, SEC standards, or others) and what those standards mean for the participant.

    Agency Affected: Department of Labor

    Status: Open

    Comments: Labor generally agreed with this recommendation, stating that such activities should be part of the department's efforts to amend the regulatory definition of fiduciary. Labor also noted that, because the current regulation addresses the circumstances under which a person becomes a fiduciary by reason of rendering investment advice for a fee, any proposed changes to that regulation could affect the types of information treated as non-fiduciary investment education under the interpretive bulletin.

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