Most of the money contributed to traditional individual retirement accounts comes from rollovers, but the choices involved in moving 401(k) savings to an IRA or from one employer-sponsored plan to another should be made easier and more efficient. That’s the finding of the U.S. Government Accountability Office in its latest report, “401(K) Plans: Labor and IRS Could Improve the Rollover Process for Participants,” released March 7. GAO said that about 95 percent of money contributed to traditional IRAs in 2008 came from rollovers, primarily from employer-sponsored retirement plans.
Concerns about whether retirement plan participants may be choosing IRA rollovers in lieu of other options that might be more beneficial to them led Congress to ask GAO to identify the challenges that plan participants who leave an employer — and sometimes their plan service providers — face.
Most 401(k) plan participants choose to take their retirement savings with them upon leaving a company, and most plan sponsors are ambivalent about continuing to manage these investments after employees depart.
Both for plan sponsors managing rollover payouts and participants deciding what to do with them, IRAs have become the prevalent vehicle for retirement funds transfer when someone leaves an employer. These accounts also have become heavily used by: (1) small-business owners who may serve as plan sponsors; (2) the self-employed; (3) independent contractors; and (4) workers not covered by an employer-sponsored pension plan.
In the past, GAO findings have showed that 401(k) plan participants may be encouraged to roll over plan balances to IRAs without understanding or considering other options.
Challenges for Departing Participants
Specifically, hurdles associated with IRA rollovers were divided into three areas:
- implementing rollovers;
- obtaining clear information about which option to choose; and
- understanding distribution options.
After reviewing federal laws and regulations, interviewing federal officials and industry experts, surveying plan sponsors and making undercover calls to 401(k) service providers to see what information is provided to plan participants, GAO recommended several steps for DOL and IRS that ultimately could affect plan sponsors’ distribution practices. Those federal agencies oversee and provide guidance for the 401(k) rollover process.
Plan sponsors, for fear of incurring added liability, may “unnecessarily limit the education they provide to plan participants about their distribution options when separating from employment,” the GAO report said. Some sponsors do not want to retain former employees’ savings in their plans for a variety of reasons such as reducing administrative burdens, costs and legal liability, GAO said.
GAO said that the number and complexity of factors when choosing IRA asset allocations make it difficult to understand the possible consequences of each factor, such as differences in tax withholding. Consequently, participants are likely to receive targeted information about rolling over into an IRA but may receive little information about options outside of their current providers’ IRAs, GAO’s research found
To read the complete story on Thompson’s HR Compliance Expert, click here. To research direct rollover procedures, go to ¶268 of The 401(k) Plan Handbook.