Spring 2013 Fiduciary Commentary

By: Brant Griffin – May 3, 2013

Plan Rollover Process Needs an Overhaul

Screen Shot 2013-05-23 at 4.05.37 PMA recent investigation by the Government Accountability Office (GAO), a notable Congressional watchdog, found that many retirement plan providers offered misleading or even false information about IRA rollovers to the plan participants they serve. This misinformation could subject participants who are changing jobs to thousands of dollars of additional fees not charged in their employer’s plan. The study also found that plan providers frequently encouraged workers who had left their employer to rollover their plan savings into an in-house IRA that generated higher fees than the employer’s plan served by the financial institution.

When participants retire or change jobs, they generally have the following options for their employer’s plan savings:

  • Maintain their savings in the previous employer’s plan (if the balance is $5,000 or more),
  • Roll-in savings to a new employer plan (if the new plan accepts roll-ins),
  • Cash-out their savings and pay the associated taxes (and penalty, if applicable) or
  • Roll-over their savings into an IRA.

Often, workers are overwhelmed by the momentous decisions that accompany a change in employment and can thus, be vulnerable to misleading information.

The GAO undercover investigation involved thirty of the nation’s largest 401(k) providers and was undertaken to comprehend how they market their investment services. Investigators discovered that service providers often misrepresented the cost differences between IRA accounts and qualified plans. In several instances, representatives also touted IRA’s greater investment flexibility over a previous employer’s offerings. The report’s conclusion was that plan service providers often encouraged IRA rollovers using misleading information to earn larger fees, even when it would be more cost effective for employees to maintain their savings in their old plans.

These findings highlight the disparities in the standards of conduct applicable in the plan environment and the retail channel’s handling of the plan distribution/ rollover process. One hopes that these inequities will further efforts to re-propose long overdue fiduciary rules that would extend to the point of distribution from a qualified plan. Recent regulatory trends and the elevation of best industry practices in plan management, support the GAO report’s implication that the qualified plan environment is better suited for retirement savers than the retail marketplace. While rolling over a retirement distribution to an IRA may be a sensible choice for some participants, the GAO has taken its position due to the inherent advantages qualified plans maintain over the retail IRA market. The advantages include:


  • Qualified plans are covered by ERISA fiduciary standards, which require plan fiduciaries (committee members and financial advisors) to make plandecisions solely in the interest of plan participants.
  • DOL disclosure rules require the accurate disclosure of qualified plan fees.
  • Qualified plans are increasingly leveraging their size and economies of scale to provide employees with more cost effective investment choices.

The GAO report comes shortly after last year’s passage of new participant fee disclosure regulations [ERISA 404(a)(5)], mandating the periodic disclosure of retirement plan fees (investment and administrative) to the plan sponsor’s employees. Alongside the new disclosures is the heightened awareness of the damaging effects high investment costs have on retirement savings. Numerous studies have shown that even a small difference in an investment’s costs can result in the loss of tens of thousands of dollars in savings.

IRA Rollovers from retirement plans are big business for Wall Street. They represent more than 90% of the contributions to the $5.4 trillion IRA market each year. As a result, the financial services industry vigorously markets their investment services to capture assets from employees that separate service from their employer. Representative George Miller (D-Calif.) said it best when commenting on the report, “The financial services industry spends substantial time and effort into marketing IRAs that may not be in the best interests of account holders.”

As a result of the report’s findings, the GAO has called on the DOL to create stronger consumer protections that would prohibit deceptive and misleading IRA marketing materials and require the standardization and full disclosure of IRA fees. North Pier feels that bolder proposals are needed. The plan-to-plan rollover process should be streamlined and more efficient for employees, and could be immediately eligible for roll-in savings to a new employer’s plan. To support this effort, the overly convoluted rules that discourage many employers from accepting rollovers (to verify the savings is tax-qualified) should be eased. Furthermore, the fiduciary rules should be re-proposed to govern the rollover process (among other items) so recommendations could only be made when they are solely in the participant’s best interest, not just to the lower suitability standard that rule their actions today. Most importantly, North Pier feels that educating retirees and employees that separate service from their employer on the benefits of maintaining savings in a qualified plan is critical for savers to make more informed decisions regarding their retirement savings.

Obama’s 2014 Budget Squeezes Retirement Savers

BudgetOn April 10, 2013, President Obama released his budget outline for the 2014 fiscal year. The proposal contains several provisions that would impact the nation’s private retirement system. Among the highlights that pertain to retirement plans, included are:

  • A cap on individual savings in tax-sheltered retirement accounts. This proposal would cap the annual benefit derived from retirement accounts to the actuarial equivalent of $205,000. Based on today’s interest rates, the lifetime limit for retirement plan savings would be approximately $3,000,000.
  • Shortened distribution periods for non-spouse beneficiaries. Obama’s budget would require non-spouse beneficiaries of IRA and retirement accounts to take distributions within five years of the date of death.
  • Mandate an “Auto IRA”. The White House’s budget would require employers that do not offer a retirement plan to provide an IRA through payroll deduction to its employees. Tax credits for employers would be expanded to facilitate the implementation of this provision.

The President’s proposal seriously impacts the tax incentives for retirement savings. In the budget negotiation process, it is likely that some of these items will be considered.

CALpers Knocks Muni Bonds from Senior Debt Status

Stockton, another city in the widely followed California bankruptcy saga, was recently granted bankruptcy protection by a California bankruptcy court. Bond issuers that opposed the city’s bankruptcy claimed they unfairly bore the brunt of the financial losses while CALpers would continue to be paid in full.

The Judge in the ruling stated that the ongoing conflict between federal bankruptcy law and the state law protecting CALpers is uncharted legal territory. The judge stated he expects the conflict to work its way through the federal appeals process, potentially all the way to the U.S. Supreme Court.

US Municipal DebtAs the population continues to age, more public workers will qualify for retirement, putting increasing pressure on local government resources. Many believe the financial burden to be unsustainable. This evolving debate in political, legal and financial circles over the status of  pension obligations will have a far reaching impact not only on public pension systems, but on municipal bond markets and other sectors of fixed-income.

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