401(k) Providers Accused Of Misleading Participants About Rollovers
401(k) plan service providers were accused of misleading participants about rollovers Wednesday by Congressional researchers.
“Plan participants are often subject to biased information and aggressive marketing of IRAs when seeking assistance and information regarding what to do with their 401(k) plan savings when they separate or have separated from employment with a plan sponsor,” contended the study by the General Accountability Office, the investigative arm of Congress.
The report noted a GAO investigator was told by call centers at seven of the 30 largest 401(k) service providers that their IRAs were “free" or had no fees with a minimum balance without divulging that investment, transaction and other fees could still apply. Five of 10 IRA Web sites GAO examined made similar claims.
The study said marketing of IRA products by plan service providers is pervasive.
GAO researchers said they were told by industry experts that:
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• Participants think that they have received investment advice from their service providers that is solely in the participants’ best interest, even though they may not actually be receiving such advice.
• Service providers use their Web sites and call centers, including making outbound calls to plan participants, as a means of marketing their firms’ retail IRA products and steering participants into them.
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• When taking a distribution, participants may be steered first into a provider’s IRA product, and if they opt out or decline that rollover option, they are then directed to a portal sponsored by the same provider where participants can access other companies’ IRA platforms, for which the service provider receives some compensation if a participant chooses a company’s IRA through that portal.
• In addition to marketing their products, service providers may offer their call center representatives financial or other incentives for asset retention when separating plan participants leave their assets in the plan or roll over into an IRA at the firm.
Senate Health, Education, Labor, and Pensions Committee Chairman Tom Harkin (D-Iowa) heralded the report as a “wake up call” for stiffer 401(k) rollover consumer protections.
“Some unscrupulous firms are making a profit by keeping customers in the dark, which is why it’s time to shine some light on the IRA rollover market and make sure those giving advice are held to the highest possible standards,” the Senate pensions committee head said.
The study urged service providers be required to clearly disclose their financial interests in participants’ decisions.
One barrier that GAO mentioned to getting clear information about rollovers to participants is that uncertainties about the Department of Labor’s ERISA definition of fiduciary may limit education offered by plan sponsors and services providers because they fear liability.
“It’s clear if DOL attaches fiduciary liability to the provision of distribution information, we expect the provision of that information to be largely eliminated, which is exactly the opposite of what GAO says is needed,” said Kent Mason, partner at the Washington, D.C., law firm of Davis & Harman.
