With the federal government making moves to protect departing employees
from bad advice around taking their 401(k) on the road, experts share insights
on what companies should be focusing on and caring about.
BY STEPHEN BARLAS
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 company 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)s
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 used in a July 2009 study
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 offers 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 401k
"rollers," it makes sense for HR managers to review retirement plan
materials, including websites, to insure 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. These measures might convince some employees, when leaving
the company, to leave their balances in the 401k rather than roll the
retirement dice by taking a lump sum, or converting to an IRA, two options
which could lead to diminished 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.” GAO suggests that 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, and 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 401k, 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.”
