401(k) Rollovers: IRA Plan Providers Mislead, Overwhelm Savers ...

Aggressive marketing of IRAs by plan providers ? often with misleading or false advise or promotional pitches ?? is costing individuals unnecessary fees and pushing them into unsuitable options when rolling over 401(k)s, according to a new government report.

Call-center representatives for financial firms often encourage rolling 401(k) savings into an IRA, ?even with only minimal knowledge of a caller?s financial situation,? said a investigation by the Government Accountability Office released Wednesday.

?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 from their employer.

The opportunity for financial firms to sell participants their own retail investment products and services, such as IRAs, often results in steering? participants toward the purchase of products and services that ?do not serve the participants? best interests,? the GAO found.

Individual retirement accounts ? known as IRAs ? have become important retirement savings vehicles for many, including small business owners, independent contractors, and other workers not covered by an employer sponsored pension plan.

But 401(k) plan participants separating from their employers find it difficult to understand and compare all their distribution options.

Information participants currently receive is either too generic and without detail, leaving them without knowing key factors to make decisions about their savings. Often, consumers are left overwhelmed and confused, the GAO said.

The GAO hired undercover investigators to call 30 of the largest 401(k) providers to review how the firms market products to 401(k) account holders.

Eleven firms encouraged a rollover to an IRA; 12 raised doubts about the caller?s ability to roll over to a new employer?s plan; and 16 promoted IRAs for having more investment options.

Seven incorrectly said that there were no fees to open or maintain an IRA, according to the GAO. Moreover, 5 out of 10 large firms advertised free IRAs on their websites, but included fee information within hard-to-find documents.

Here?s an example from the GAO report:

For example, in response to a call from our investigator, a representative at a service provider?s call center said that IRAs differ from 401(k) plans because an IRA ?has no taxes.?

The representative did not explain what taxes he was referring to in his comment. Though IRA cash outs to not require up-front tax withholding the way 401(k) plan cash outs do, ultimately most IRA and 401(k) plan distributions will be taxed the same way at the end of the year.

Given many individuals? lack of basic financial literacy, such a statement could be misunderstood by some to mean that savings in a 401(k) plan are taxed but savings in an IRA are not. In fact, both IRAs and 401(k) plans offer a place to accumulate retirement savings tax ? free until distribution.

The GAO recommends that the U.S. Department of Labor and the Internal Revenue Service work to ensure that individuals receive ?complete and timely information, including enhanced disclosures, about the distribution options for their 401(k) plan savings? when separating from an employer.

In response, Labor and Treasury generally agreed with the findings and will explore ways to implement these recommendations.

The GAO said the Secretary of Labor should require plan service providers to disclose any financial interests they may have when assisting individuals with distribution options ?in a clear, consistent, and prominent manner.?

Source: http://ecreditdaily.com/2013/04/401k-rollovers-ira-plan-providers-mislead-overwhelm-savers-gao/

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