Investment advisers agree that rollovers from defined-contribution plans such as 401(k)s into individual retirement accounts can be tinged with conflicts of interest, but they say that a new government report on rollovers failed to mention the role that they can play in resolving such conflicts.
Martin Smith, president of Wealthcare Financial Group Inc., a fee-only retirement planning and portfolio management services firm, considers rollovers inherently self-serving.
“It's the best double-dip there is,” he said.
“That's how you build your book of business. You sell 401(k)s and then capture the IRA rollovers,” Mr. Smith said.
Plan participants tend to have a high level of trust in 401(k) plan service providers, who perform investment management, record keeping and other tasks.
“You have a captive market to prospect. They've seen you, they know you, they trust you,” Mr. Smith said.
“It's very easy to convince them to transfer their money from their 401(k) to an IRA,” he said.
ALARMING REPORT
In a report released last week, the Government Accountability Office, the investigative arm of Congress, concluded that that process is undermining the ability of workers to build their retirement nest eggs because they aren't given clear information about their options.
When they leave a job, employees' options include keeping their money in their existing plan, rolling it into a plan sponsored by their new employer, rolling it into an IRA or taking a lump-sum distribution.
As part of the study, GAO personnel called 30 of the largest 401(k) service providers, posing as plan participants. They often were barraged with IRA sales pitches.
“A third of the 401(k) plan service providers called by [one of] our investigator[s] seeking information about options for his 401(k) plan savings at his ex-employer's plan offered to assist the caller with an IRA rollover, but just one of those offered to assist with a plan-to-plan rollover,” the report stated. “GAO found that service providers' call center representatives encouraged rolling 401(k) plan savings into an IRA even with only minimal understanding of a caller's financial situation.”
That result doesn't surprise Ron Rhoades, assistant professor of business at Alfred State College.
“There's no doubt that the sell-side of the investment industry is looking at baby boomers as a huge source of potential profits,” Mr. Rhoades said.
Rollovers can be lucrative for financial companies that run both 401(k)s and IRAs.
In the third quarter of last year, $3.5 trillion was held in 401(k)s and $5.3 trillion in IRAs, according to the Investment Company Institute.
In 2011, the ICI reported that more than half of IRA-owning households had rolled over money from 401(k) plans into those accounts.
TROUBLE SPOTS
The GAO identified several trouble spots for rollovers, including waiting periods to roll into a new employer plan, complex verification procedures, big divergences in paperwork and inefficient processing. The GAO recommended that the Labor Department and the Internal Revenue Service standardize plan rollovers, make them more efficient and provide better information to workers about their options — in the form of a plain-English summary.
The report mentions investor education, but not to the extent that would satisfy financial advisers such as Kevin Berenzweig.
“People are not adequately educated — period — on how to save for retirement,” said Mr. Berenzweig, a retirement adviser for RSG Partners Inc.
“If I was a senator, I would pass legislation that focuses on educating the mass public on how to plan for retirement,” he said. “You do that well enough, and you put people like me out of business.”
One shortcoming in the report was that it either ignored investment advisers or looked at them skeptically, according to Neal Solomon, managing director of WealthPro LLC.
Advisers should be given more access to workers trying to build their nest eggs, he said.
“Overall, I'm much more concerned that people are not getting quality advice,” Mr. Solomon said. “I'd like to see it made easier for qualified advisers to work with individuals and their assets when those assets are in a 401(k) plan.”
Mr. Smith also would like restrictions on service providers preventing them from monopolizing a plan's investment guidance.
“If you're going to sell the plan, maybe an employer or DOL could ensure that another adviser gets to offer advice,” he said.
One GAO recommendation — that the Labor Department finalize a rule expanding the scope of retirement plan professionals defined as fiduciaries — got the strong endorsement of Mr. Rhoades.
The rule, which was first proposed in 2010 but then withdrawn amid fierce industry backlash, is expected to be re-proposed this summer.
“That is a game changer in the financial services industry, if that rule gets finalized,” Mr. Rhoades said.
But a new rule also is likely to provoke controversy.
A lawyer who represents 401(k) plan service providers and sponsors cautioned that applying a fiduciary duty to brokers who sell IRAs could force them out of the market and leave investors without affordable advice.
“We're not trying to tilt the playing field,” said Kent Mason, a partner at Davis & Harman LLP.
“The objective is to provide the best information possible so that participants can make the best decision,” he said. “But if there is fiduciary liability associated with the provision of information, that information will dry up, which is exactly the opposite of what GAO is recommending.”
mschoeff@investmentnews.com Twitter: @markschoeff
