When leaving an employer and starting a new job, 401(k) plan participants often find it easier to roll their account funds into an individual retirement account (IRA) rather than into their new employer's plan, according to a study by the U.S. Government Accountability Office.
The challenges to 401(k) plan-to-plan transfers include the waiting period to roll into a new employer's plan, complex verification procedures to ensure savings are tax-qualified, big differences in plans' paperwork and inefficient processing practices. These hurdles often make rolling 401(k) funds into a self-directed IRA "an easier and faster choice, especially given that IRA providers often offer assistance to plan participants when they roll their savings into an IRA," according to the March 2013 report, Labor and IRS Could Improve the Rollover Process for Participants. The Department of Labor (DOL) and the Internal Revenue Service are the federal agencies that oversee 401(k) rollovers.
401(k) or IRA?
When plan participants leave an employer, they often receive advice and marketing favoring IRAs from financial services firms, the GAO found. "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," and the DOL's current requirements "do not sufficiently assist participants in understanding the financial interests that service providers may have in participants' distribution and investment decisions," the GAO states.
The report recommends that the DOL and IRS take steps to make 401(k) 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. In addition, it advises the DOL to ensure that plan participants receive complete and timely information about the distribution options for their 401(k) plan savings when they leave a company. "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," the report noted.
The GAO also recommends that the DOL clairfy the Employee Benefits Security Administration's 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 Worst Option
The Financial Industry Regulatory Authority, which helps oversee the financial services industry, advises 401(k) participants who are changing jobs to consider the following points:
Putting all your retirement savings into one 401(k) plan has its advantages. For example, it will make it easier for you to track your assets’ performance. But you should evaluate your new employer’s plan before deciding to roll your assets over. Make sure the new plan has plenty of investment choices and includes the investment options you prefer. Also check to make sure that accompanying fees aren’t too high. If you’re unhappy with the options provided by your new employer’s 401(k), you can always consider your other options, including a rollover into an IRA.
The worst decision departing employees could make, according to FINRA, is to cash out the money in their account instead of rolling it over into either an IRA or a new 401(k) plan, where the funds can continue growing on a tax-advantaged basis and help provide a secure retirement.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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