Compliance March 26, 2014

An Inside Perspective on Rollover Rulemaking

Ever wonder why so many different regulators are voicing concern over employer-sponsored retirement plan account rollover practices—especially rollovers into individual retirement accounts (IRAs)?
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Besides the Department of Labor (DOL), which has been considering a new fiduciary definition that could add certain IRA rollovers to the list of prohibited transactions barred by the Employee Retirement Income Security Act (ERISA), both the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) are weighing rollover rule changes of their own (see “Some Advisers May Want to Pause on Rollovers”). Why so much simultaneous attention from the distinct regulatory groups?  

Follow the money, says Tamara Cross, assistant director of education, workforce and income security issues at the Government Accountability Office (GAO). She points to a wide range of research showing rollovers into IRAs could top $2.1 trillion over the next five years (see “For IRAs, It’s All About the Rollover”). With so much money flowing out of the employer-sponsored plan environment, it’s no surprise multiple regulators want to head off potential conflicts of interest and make sure participant dollars are treated fairly, Cross says.

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Cross discussed the various regulatory efforts related to IRA rollovers and plan distributions during the final day of the 2014 NAPA 401(k) Summit, hosted by the National Association of Plan Advisers (NAPA) in New Orleans. She describes the role of her agency as the “watchdog of Congress” that conducts nonpartisan investigations into social and economic issues. The results of GAO investigations are shared with lawmakers and a long list of regulatory agencies that have a standing in the various subjects on which the office reports.

A little more than a year ago the GAO published a report on IRA rollovers and plan distribution practices, Cross explains, which was shared with Congress, the DOL, the SEC and others. The report levels fairly harsh criticism at the DOL and the other regulatory groups tasked with policing the different facets of plan rollovers and distributions. Cross says the GAO observed a systematic bias towards IRA rollovers compared with other options participants have for pulling assets out of an existing 401(k) account and strongly encouraged the various regulatory groups to reconsider how they oversee rollovers.

“During our research we saw the most significant barriers exist when it comes to participants rolling their assets into a new plan,” Cross explains. “Compared with IRA rollovers, service providers make plan-to-plan rollovers exceedingly difficult. We’re urging the regulators to change that.”

One problem is the complete lack of standardization among service providers (and thus within employers’ plan designs) on the steps required to move money from plan to plan, Cross says. Some plans and providers require a lengthy waiting period, while others allow immediate plan-to-plan rollovers. Some plans require the assets being rolled in to be independently verified as coming from a qualified plan, because if problems arise with those assets it can lead to the disqualification of the entire new plan, she says.

Cross explains that IRA rollovers are not necessarily simpler for the individual participant, but IRA rollover service providers tend to aggressively court participants with offers of help in navigating the rollover process. When it comes to plan-to-plan rollovers, far less assistance is typically available, she says, so participants must rely on fiduciary advisers who may be reluctant to give specific advice because of conflict of interest rules already on the books.

Cross explains that regulators are also concerned about marketing practices for IRA rollovers. The GAO’s report and investigation found that plan participants often receive guidance and marketing that favor IRAs when they look for guidance on their 401(k) plan savings. This is especially true when participants turn to providers’ call center representatives for advice, Cross says, as often advice is given to roll into an IRA when call center reps don’t know anything about a participant’s individual circumstances—which could call for another option.

The GAO believes participants may also interpret plan information about retail investment products from the plan’s service providers as suggestions to choose those products, Cross says. “We absolutely don’t want to give the impression that it’s bad to offer assistance on rolling into an IRA, or that IRAs are an inferior option,” she adds. “What we have a problem with is whether they’re taking a suggestion as coming from a fiduciary when it is not. We’ve seen participants tend to think any advice they receive in a plan context is given in their best interest, when currently that is not the case. If you’re pervasively persuading participants to go into an IRA and they’re thinking you’re giving unbiased information about the options, that’s the conflict.”

Data & Research March 26, 2014

Employees Still Have Concerns About Retirement

While U.S. workers are more satisfied with their financial situation now compared with five years ago, their retirement confidence still remains below levels prior to the financial crisis.
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According to the Global Benefit Attitudes Survey, released by professional services firm Towers Watson, employees are especially worried about the affordability of health care in retirement, and significant numbers have been forced to cut back on spending and plan to delay retirement, many until age 70 or later.

The nationwide survey of 5,070 full-time employees finds that nearly half of respondents (46%) are satisfied with their current finances, an increase from 26% in 2009. However, nearly six in 10 (58%) remain worried about their financial future. Employees’ confidence in their ability to retire has increased since the financial crisis, with nearly one-quarter (23%) of employees saying they are very confident in their income sufficiency for the first 15 years of retirement. However, confidence levels decrease when employees look farther ahead, with only 8% being very confident they would have adequate income 25 years into retirement.

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“Employees might be on firmer financial footing now than they were five years ago, but many remain nervous about their finances and prospects for a secure retirement,” says Shane Bartling, senior consultant at Towers Watson, based in New York. “This is especially true for older workers who are likely better positioned to assess their retirement income than workers overall. The financial crisis hit workers age 50 and above particularly hard, with the stock market fall creating a huge dent in their retirement savings and their confidence levels.”

The survey also shows that employees of all ages are worried about health care costs and public programs. Only two in five employees believe they can afford any medical expenses that will arise over the next year. These concerns are more pronounced for mid-career and older employees, as well as those in poor health. In addition, more than half of employees (53%) are concerned they will not be able to afford the health care they need in retirement. Also, 83% of employees believe Social Security will be less valuable in the future, and 88% have similar fears about Medicare.

Survey results indicate that employees are taking steps to address their financial concerns and have made it a priority to pay off debt, save for retirement and otherwise exert more control over their household budgets. More than half of employees (56%) are spending less and postponing big purchases. Employees admit they need to save more for retirement, and are becoming more active and interested in retirement income planning. Just over half (51%) review their retirement plans frequently. The survey notes that saving for retirement is cited as the number one financial priority for all employees age 40 and older.

“Employees are getting the message that their future health care costs should be an integral factor in their retirement planning. Escalating health care costs continue to claim larger shares of paychecks. And workers’ pessimistic outlook for Social Security and Medicare adds not only to their expected financial burden but also to the age at which they can retire,” says David Speier, senior consultant at Towers Watson.

With many employees expecting to fall short on their retirement savings, survey findings show that nearly four in 10 employees plan on working longer—an increase of 9% since 2009. A majority of these employees expect to delay retirement by three or more years, and 44% plan on a delay of five years or more.

The profile of those delaying retirement tends toward the disengaged, less healthy and more stressed. These findings suggest a higher average retirement age in the future, according to Towers Watson. In 2009, 31% of workers planned on retiring before 65, and 41% planned on retiring after 65. According to the 2013 survey, only 25% plan on retiring before 65, and half expect to retire after 65. One in three employees either does not expect to retire until after 70 or doesn’t plan to retire at all.

“Employers and employees are both facing increasing retirement pressures,” says Bartling. “Employers understand that they have a role to play in helping their workers plan and save for a secure retirement. Today’s employees are considerably more engaged, and are looking to their employers for more information about health care costs and the value of their retirement programs. The proliferation of tools, including mobile apps, also represents an opportunity for employers to help their employees plan for a successful retirement.”

The survey, which examined employees’ attitudes about health and retirement benefits, was conducted in 12 countries between July and September 2013. The survey was completed by 22,347 employees, including 5,070 full-time workers in the United States, representing all job levels and major industry sectors.

More information about the survey can be found here.

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