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.

Multimedia:

  • GAO: Examples of 401(k) service providers giving a potential participant guidance favoring IRAsVIDEO: Examples of 401(k) service providers giving a potential participant guidance favoring IRAs
    A GAO investigator phoned thirty 401(k) plan service providers, posing as someone about to start a new job and who may become a participant in a new employer’s 401(k) plan.
  • GAO: AskGAOLive Chat on Retirement SecurityVIDEO: AskGAOLive Chat on Retirement Security
    Online video chat with Charles Jeszeck, Director, Education, Workforce and Income Security.

Additional Materials:

Contact:

Charles A. Jeszeck
(202) 512-7036
JeszeckC@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Department of Labor has stated that the plan design features of the sort described in this recommendation historically are not subject to the Department's regulatory authority under Title 1 of ERISA. However, the Department consulted with the ERISA Advisory Council and, in 2015, the Council drafted tips, principles, and samples for plan sponsors to consider with the aim of increasing lifetime plan participation (which means participants do not unnecessarily take distributions of their benefits). We encourage the Department to proceed with soliciting public comment on the Council's report and other steps needed to publish tips and FAQs to educate plan sponsors about plan design features that encourage lifetime plan participation in a range of sample communications. Importantly, the "conflict of interest" rule finalized by the Department in April 2016 may increase standardization in plans' rollover practices by ensuring that sponsors and participants have complete and unbiased information about distribution options. For example, by specifically noting that information about distribution options and the benefits of plan and IRA participation are a form of education, Labor has made it more likely that plans and individuals will have ready access to this critical information. The greater the clarity and availability of balanced information about distributions options, the greater the likelihood of plan sponsors adopting policies that foster better retention of participant savings in employer-based plans. Additionally, we are encouraged by the Department's own continuing retirement savings education efforts, which can help to ensure that plan sponsors and participants both have access to accurate and balanced information about the range of distribution options and factors to consider in choosing one.

    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

  2. Status: Closed - Implemented

    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. IRS issued a Revenue Ruling (2014-9) that addresses the obstacle of some plans not being open to plan-to-plan rollovers because of concerns about non-qualified savings entering the plan. This step addresses those concerns and can positively affect the standardization of plan practices and the ability of participants to keep their savings in an employer-based plan when changing jobs. Also, in February 2017, IRS released an educational YouTube video directed at plan participants explaining the two rollover methods for plans and IRAs, including barriers to rollovers related to the 60 day rule. Because the lack of understanding of rollover rules is one obstacle to leaving money in a plan environment, this education video can help to increase plan-to-plan rollovers, even if it is not singularly focused on leaving savings in an employer plan. We encourage further review of policies that may discourage leaving savings in an employer plan.

    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

  3. Status: Closed - Implemented

    Comments: Through joint outreach and deliberate referrals to Internal Revenue Service (IRS) policy and regulations, Labor has taken action to help ensure that sponsors are aware of important IRS guidance, including the Revenue Ruling 2014-9. Revenue Ruling 2014-9 explains that plans will not necessarily lose tax-qualified status if they, in good faith, accept non-tax-qualified assets through a rollover, later identify the error, and remove the assets from the plan. In 2017, Labor reported that it works with IRS on an ongoing basis to educate plan sponsors on matters of IRS regulation, such as Rev-Ruling 2014-9. Labor's educational materials for employers communicates IRS guidance on a range of topics and provides links to the IRS website. Labor and IRS jointly sponsor seminars, such as "Getting It Right - Know Your Fiduciary Responsibilities," which provide information on tax qualification, avoiding common mistakes, and IRS' voluntary compliance program. We encourage both agencies to specifically include references to IRS' guidance on relief from tax disqualification in concert with information about rollovers, to help ensure that sponsors' fears of disqualification do not unduly discourage them from permitting rollovers by new participants. In addition, Labor stated that it will continue to identify areas where it can assist the IRS in outreach efforts.

    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

  4. Status: Closed - Implemented

    Comments: In April 2014, the agency issued Revenue Ruling 2014-9, which explains to plans that they will not necessarily lose tax-qualified status if they, in good faith, accept non-tax-qualified assets through a rollover, later identify the error, and remove the assets from the plan. This guidance will help to facilitate rollovers into 401(k) plans and make it easier for individuals to keep their savings in an ERISA-protected plan environment when they choose to do so.

    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

  5. Status: Closed - Not Implemented

    Comments: Treasury generally agreed with this recommendation. However, it has not revised the 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. The agency also did not update its FAQs, in particular, question A-4 to clarify that distributees should generally send checks to the receiving trustee.

    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

  6. Status: Closed - Implemented

    Comments: The Department of Labor (Labor) consulted with the ERISA Advisory Council about ways it could assist Labor in this area. The 2015 Council drafted for Labor's consideration, tips, principles, and samples for plan sponsors to consider when communicating with eligible participants. The Council indicated that these draft materials could be further enhanced if reviewed by plan sponsors, communications experts and academics, as well as through test marketing prior to release. Subject to the limits on Labor's authority in this area and resource constraints, the agency is considering ways to obtain public input on the Council's recommendations and draft materials. The "conflict of interest" rule, finalized by Labor in April 2016, may help to ensure that sponsors and participants have complete and unbiased information about distribution options. For example, by specifically noting that information about distribution options and the benefits of plan and IRA participation are a form of education, Labor has made it more likely that individuals will have ready and continuous access to this basic but critical information.

    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

  7. Status: Closed - Implemented

    Comments: On January 28, 2016, the Department of Labor submitted its final Conflict of Interest rule, which would amend the regulatory definition of the term "fiduciary," to the Office of Management and Budget for review.

    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

 

Explore the full database of GAO's Open Recommendations »

Aug 24, 2017

Jul 20, 2017

Apr 24, 2017

Dec 20, 2016

Nov 21, 2016

Sep 14, 2016

Sep 8, 2016

May 5, 2016

Apr 13, 2016

Looking for more? Browse all our products here