“Bundled” retirement plan recordkeepers have significant financial incentives – and a surprising number of strategies—to convince employees to roll assets into IRAs.
Individual Retirement Accounts (IRAs) are big business.
According to the Investment Company Institute (“ICI”), IRAs held $9.5 trillion in assets at the end of 2018. Significantly, rollovers are the foundation of the IRA market—over 95% of the money flowing into IRAs comes from rollovers (rather than new contributions), with rollovers totaling over $450 million per year. (Investment Company Institute, Statistics, Quarterly Retirement Market Data).
This financial behemoth poses a unique challenge to employer-sponsored retirement plans. Many plan recordkeepers provide “bundled” services and offer both retirement plan recordkeeping services as well as an array of other (often proprietary) financial services and products—including IRAs. And so, these bundled providers have an inherent conflict. If a plan participant has a distributable event (such as termination of employment or retirement)—should the recordkeeping provider explain the benefits of leaving his or her balance in the retirement plan or should the recordkeeper focus on the virtues of a rollover into the recordkeeper’s IRA?
From a financial perspective, bundled recordkeepers have tremendous economic incentives to favor the IRA rollover over retaining assets in the employer-sponsored plan or a rollover to another employer plan. Fees charged in employer plans are carefully scrutinized by plan fiduciaries and must be clearly disclosed to plan participants. On the other hand, IRA fees or fees for financial products offered within an IRA (such as managed accounts) face no such scrutiny. See our prior blog on this topic.
Bundled providers’ economic temptations to favor IRAs would have been curbed by the (now defunct) expansion of fiduciary rules proposed by the DOL: advising participants regarding the disposition of plan assets would have been a fiduciary activity under those proposed rules. However, in the vacuum created by the court decision to overturn the fiduciary expansion, bundled providers have tremendous flexibility in seeking ways to steer employees into IRAs.
A report issued by the Government Accountability Office (GAO) in 2013, before the DOL fiduciary regulations were proposed in their final form, provides a vivid reminder of the ways that bundled recordkeepers can steer participants into rollovers. Among some of the practices cited:
• When GAO investigators (posing as plan participants) called plan providers seeking information about rolling money from a former employer plan, ten (of the 30 providers called) offered to assist the caller with a rollover into an IRA. Only one provider offered to assist with a plan-to-plan rollover.
• When the GAO investigator called thirty 401(k) plan service providers, posing as a potential participant in plans serviced by the providers, the investigator found that:
◦ 11 service provider representatives encouraged him to roll his plan savings to an IRA instead of to the new plan without specific knowledge of his financial circumstances;
◦ 16 (of the 30) of the representatives brought up the fact that IRAs have more investment options than 401(k) plans;
◦ Some of the call center representatives did not mention the option of leaving funds in the old plan; and
◦ 12 (of the 30) representatives raised doubts about the caller’s ability to roll over to a new 401(k) plan.
• The GAO report quoted these provider representatives as making statements like “you are not missing anything by rolling it over, but you are forfeiting some things by leaving it where it is.”
• Bundled providers may have different processes for rolling money into an IRA (the quick, on-line route—with rep assistance) versus rolling money into an employer plan (the slow, paper form-based, do-it-yourself route).
These different procedures for different rollovers are meaningful. As noted in the GAO study, 68 percent of individuals surveyed rated “quick and easy access to open the account” as important to their rollover decision and 52 percent rated “assistance in completing the forms to open the account” as another important factor.
The messaging coming from these providers is also impactful. A recent survey by T. Rowe Price finds that 64% of workers rely on their employer’s plan provider as a source for financial advice.
And, to top it all off, providers offer financial incentives for individuals to open IRAs—some offering as much as $600.
Providers’ focus on the promotion of IRAs poses legal risks to plan fiduciaries and financial risks to the employer-sponsored plan itself. As a result of the conflicts inherent in bundled providers’ financial incentives and the risks created by these conflicts, fiduciaries that utilize a bundled recordkeeper must add one more item to their fiduciary “to do” list—ensuring that the provider information about participants’ distribution alternatives is supporting the employer-sponsored plan and not the provider’s IRA business. Fiduciaries can take a number of steps to ensure that providers’ financial interests do not overwhelm participants decision-making; a more detailed discussion of those steps will be addressed in a future posting on this site.