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Savings in Motion

With the federal government making moves to protect departing employees from bad advice around rolling over their 401(k)s, experts share insights on what companies should be focusing on and caring about.

Wednesday, July 24, 2013
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The demise of defined-benefit pensions and the collapse of retirement savings during the 2008-2009 recession have forced HR leaders to confront the cloudy future awaiting employees in what should be their sunshiny retirement years.

Those skies can be doubly ominous for employees making bad decisions about rolling over 401(k) funds when leaving a company, either for retirement or another employer. In too many instances, those unholy rollers are leaving companies with their retirement-fund balances transferred into individual retirement accounts, a decision made based on inadequate or biased information, according to a March report from the Government Accountability Office.

That report, 401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants, concludes the current rollover process favors 401(k) distributions to IRAs by employees who continue to be "susceptible to the ongoing and pervasive marketing of IRAs." The GAO's implicit concern about too many IRA rollovers is based on the fact that they often have higher costs than 401(k)s and none of the oversight, such as standards for plan fiduciaries required under the Employee Retirement Income Security Act, which mandate, for example, that a company select investment options in the best interests of the participant.

In comparison, IRAs are lawless territories. IRA providers generally offer retail mutual funds and reserve less costly share classes for only those individuals with large balances. Administrators of 401(k) plans often absorb administrative and non-investment fees. Not true for IRAs.

Motorola Solutions, for example, offers its 401(k participants nine institutional index funds with rock-bottom average expense ratios below 10 basis points. That may have something to do with the fact that half of exiting company employees leave their 401(k) accounts at Motorola Solutions, a fairly astounding percentage compared to industry averages. Motorola defies other industry averages, too. Just 9 percent of departing employees have taken their 401(k) balances in cash; 41 percent roll over the 401(k) into either an IRA or the 401(k) of another employer, with a majority going into an IRA.

Contrast those percentages with industry averages culled from 2004-to-2006 Census Bureau data and used in a study -- More Detail on Lump-Sum Distributions of Workers Who Have Left a Job -- published by the Employee Benefit Research Institute. Stephen Blakely, a spokesman for EBRI, says this is the most recent data EBRI has on 401(k) rollovers. It examines workers' decisions to a take a lump-sum distribution from an employment-based retirement plan when changing jobs, while remaining in the labor force. The overwhelming choice for rollovers was an IRA, which accounted for 69.5 percent of all of the most recent lump-sum distributions that were rolled over. The next-most-likely choice was to roll over a distribution to a plan at another job, at 16.4 percent.

How has Motorola suppressed the appetite of departing employees for IRAs? Sheila Forsberg, senior director of U.S. benefits, says her company has hired "unbiased" vendors to advise the company's 9,700 U.S. employees on both how to invest within their company 401(k) -- which they are automatically enrolled in upon employment -- and on what to do with 401(k) balances when leaving the company.

Aon Hewitt is the record-keeper, Financial Engines is the individual investment adviser and Northern Trust Global Investments manages the nine Northern Trust institutional index funds available to Motorola Solutions employees. None of these companies offer either IRAs or annuities, as is typically the case with record-keepers and investment managers that offer their own retail IRAs to departing employees as the "best option" when those employees leave a company 401(k).

The Department of Labor and the Treasury Department had been concerned before the GAO report was published about the "steering" of employees by biased 401(k) vendors into products from which those advisers profited. The DOL made an incipient effort in October 2010 to expand the definition of a "fiduciary" under ERISA so as to include more service providers to 401(k) plans. Fiduciaries have legal liability for the advice and information they provide, and are restricted to what kind of information they can provide.

The current ERISA definition generally restricts the definition of fiduciary to those providing tailored investment advice to individual retirement-plan participants. But it is not clear what constitutes "investment advice" and how it differs from more general investment education. The GAO report says: "Many plan sponsors and service providers are uncertain and concerned about what they can provide to plan participants. As a result, for fear of incurring added liability, plan sponsors and service providers may unnecessarily limit the education they provide to plan participants about their distribution options when separating from employment."

Alison Borland, vice president of retirement solutions and strategies for Aon Hewitt, supported the expansion of the fiduciary decision to more 401(k) service providers. "We said service providers advising participants on financial decisions should be unbiased," she says. "But we were in the minority. There was a lot of concern about the definition expansion from people making money on IRA rollovers."

Given that the DOL is likely to mandate, sooner or later, that companies provide fuller information to prospective 401(k) "rollers," it makes sense for HR leaders and managers to review retirement-plan materials, including websites, to ensure that departing employees get a full view of the financial road ahead as they drive off into either the sunset or the parking lot of another company.

Credentialed Expertise

Perhaps adding to the confusion generated by the murky fiduciary definition is the absence of any "best practices" for 401(k) plan vendors. The Center for Fiduciary Excellence offers certifications for investment managers, fiduciaries and record-keepers, the latter based on a standard of practice developed by a cross-industry task force chaired by the American Society of Pension Professionals & Actuaries. The CEFEX has been around since 2006. But few 401(k) vendors avail themselves of any of those certifications.

TIAA-CREF is one of the companies that has obtained a CEFEX/ASPPA certification as a record-keeper, a function it provides for 15,000 nonprofit institutions whose 403(b) plans it handles. For many of those plans, it also provides investment advice to plan participants and, of course, offers its own institutional class investment products.

The CEFEX/ASPPA standard does not prevent TIAA-CREF, or any other retirement-plan vendor, from steering participants into its own investment products, such as IRAs or annuities. The record-keeping certification only looks at TIAA-CREF's record-keeping platform to ensure it is scalable, that it has quality controls in place, that the information it provides is accurate and that other operational details are satisfied.

But Ray Bellucci, TIAA-CREF's senior managing director of institutional client solutions, says the company does hire third parties to do surveys of 403(b) plan participants who have accessed the TIAA-CREF call center or one of its campuses. One of the key questions the surveyor asks is whether the participant feels the information it received from the call center representative was objective. Bellucci says 98 percent of respondents say "yes." He adds, "To us, that is a key indicator of success."

Additional Fixes

Besides changing the contours of investment information 401(k) vendors can provide, the Labor Department is also considering some other changes in this area. In May, the DOL took another tentative step with an advanced notice of proposed rulemaking that would require a participant's accrued benefits to be expressed on his or her pension-benefit statement as an estimated lifetime stream of payments, in addition to being presented as an account balance. A second component of that rulemaking is the consideration of a rule that would require a participant's accrued benefits to be projected to his or her retirement date and then converted to, and expressed as, an estimated lifetime stream of payments.

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Ostensibly, both measures might convince some employees, when leaving the company, to leave their balances in the 401(k)s rather than roll the retirement dice by taking a lump sum, or converting to an IRA, two options that could lead to less security decades down the road.

The GAO report made a number of suggestions about how the DOL could improve its regulations so 401(k) participants faced with distribution decisions could receive better information. Making it easier for a new employee to transfer his or her 401(k) from a former company topped the list. New employers are justifiably worried about taking an "old" 401(k), which may not be properly tax-qualified. So they make new employees jump through paperwork hoops to prove their old 401(k) is kosher.

But the GAO argues: "Plan sponsors' caution and confusion about IRS policies regarding the consequences of inadvertently accepting funds from nonqualified plans is especially puzzling, given the agency's clear guidance stating that a plan will not be at risk of losing its qualified status if it reasonably concluded that the distributing plan was qualified."

In the report, the GAO suggests the DOL and IRS "review the lack of standardization of sponsor practices related to plan-to-plan rollovers ... 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, [as well as] charging different fees for inactive participants."

The departure company doesn't make a 401(k)-to-401(k) transfer easy, either. Motorola Solutions' Forsberg says her company provides a departing employee an IRS "determination letter" upon request. That letter attests to the qualified status of the Motorola plan. But she explains that some companies claim the IRS letter is not good enough.

"An employee will then contact us and say her new employer wants someone at Motorola Solutions to also provide a separate letter stating our plan is qualified," she says. "We try to do that quickly, within a day or two of receiving the request."

Motorola Solutions actually hopes departing employees will keep their balances in the Motorola 401(k), and for good reasons. And there are equally good reasons the incoming company would want to get those assets, too. Robyn Credico, defined contribution practice leader for North America at New York-based Towers Watson, says, regarding the outgoing company, there are two different schools of thought. One says the company would rather you leave the plan, because it reduces administrative costs and potential legal issues. The second school says the company should want to retain a departing employee's assets in its 401(k) because the greater the plan assets, the more efficient the investment vehicles will be, and the lower the expense ratios will be.

"Until now, we have not paid much attention to enticing a new employee to bring his existing 401(k) with him when he joins the new company," Credico says. "But it makes some sense for an employee to consolidate his assets in one place. And it helps the new employer, too, if [its] employees are in better shape financially as they near retirement.

"Employees who are not [in sound shape] are more likely to stay in place, which can mean higher healthcare costs for the employer, plus those older employees tend to be higher paid, not to mention sometimes less engaged, because they would rather not be there.

"And their staying makes it harder to promote younger employees," Credico says.

 

 

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