IRS and DOL should take steps to improve rollover process for 401(k) participants, GAO advises

In a recent report, the Government Accountability Office (GAO) has recommended that the IRS and Labor Department take steps to reduce obstacles and disincentives to plan-to-plan rollovers, such as reducing the waiting period to make rollovers into a 401(k) plan and improving the asset verification process. According to the GAO, 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.

Current process favors IRA rollovers

The current rollover process favors rollovers to IRAs, as opposed to plan-to-plan rollovers, the GAO found. Waiting periods to roll into a new employer plan, complex verification procedures to ensure savings are tax-qualified, wide divergences in plans’ paperwork, and inefficient practices for processing rollovers make IRA rollovers an easier and faster choice, especially given that IRA providers often offer assistance to plan participants when they roll their savings into an IRA, said the GAO. The GAO expressed concern that participants may be encouraged to choose rollovers to IRAs in lieu of options that could be more in their interests.

GAO recommendations

To help reduce obstacles and disincentives to keeping retirement savings in the 401(k) plan environment, the GAO report recommends that the IRS and Labor Department review policies that affect separating employees leaving retirement savings in an employer’s plan and, for those who choose to roll their distributions into another 401(k) plan, the process of plan-to-plan rollovers.

As part of such a review, the GAO recommends that IRS and Labor review the lack of standardization of sponsor practices related to plan-to-plan rollovers and of policies affecting participants who leave plan savings in a former employer’s plan, with the aim of taking regulatory action. 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 GAO said.

In addition, IRS and Labor “should work together to communicate to plan sponsors IRS’s guidance on the relief from tax disqualification provided for plans that accept rollovers later determined to have come from a plan that was not tax qualified.”

The GAO further recommends that the IRS revise rules that allow plans and providers to send direct rollover distribution checks to individuals rather than to the receiving entities to which the checks are written.

The Labor Department should develop a concise written summary explaining a participant’s distribution options and listing key factors a participant should consider when comparing possible investments, the GAO said, and plan sponsors should be required to provide that summary to a participant upon separation from an employer.

Finally, the GAO report recommends that the Labor Department finalize its rules clarifying the ERISA 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 conditions under which they are subject to any regulatory standards (such as ERISA fiduciary standards, SEC standards, or others), and what those standards mean for the participant.

Source: GAO-13-30, “Labor and IRS Could Improve the Rollover Process for Participants,” March 2013.

Source: Kirkendall v. Halliburton, Inc. (CA-2).

Source: General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals, Department of the Treasury, April 2013. EBRI press release, April 10, 2013. ASPPA press release, April 5, 2013. ERIC press release, April 10, 2013. PSCA press release, April 10, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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