GAO Uncovers Troubling Practices Carried Out by Financial Firms that Drain Americans’ 401(K) Retirement Savings in Report Requested by Rep. Miller, Sens. Harkin and Nelson

April 3, 2013
 
WASHINGTON, D.C. - America's workers are often presented with false and misleading information regarding fees and their options on what to do with their 401(k) assets when they leave an employer, according to a Government Accountability Office (GAO) investigation released today by Rep. George Miller (D-CA), Sen. Tom Harkin (D-IA), Sen. Bill Nelson (D-FL). Following the release of the report, Miller, Harkin, and Nelson called on the Departments of Labor (DOL) and Treasury to act on GAO's recommendations, including protecting consumers from deceptive marketing materials disguised as advice, establishing uniform standards and model notices to assist 401(k) accountholders in making better-educated decisions on their retirement savings, ensuring the full disclosure of Individual Retirement Account (IRA) fees, and encouraging people to keep their retirement savings in the 401(k) system. The leaders pledged to work on legislation in Congress to address these goals, if need be.
 
In a letter sent to DOL and Treasury today, Miller, Harkin, and Nelson wrote: "For most workers, [their 401(k)] is their largest financial asset, and they have a right to full and fair information on all of their investment options. Service providers should not be permitted to provide incomplete information or steer workers to company investment products."
 
"As the GAO investigation shows, the financial services industry spends substantial time and effort into marketing IRAs that may not be in the best interests of accountholders. This comes as no surprise since IRAs often come with higher costs when compared to a 401(k). But you wouldn't know this if you pay attention to the often deceptive marketing that GAO highlighted," said Rep. Miller (D-CA), the senior Democratic member of the House Education and the Workforce Committee. "This is the employee's money and they should have simple, straightforward and honest information during the rollover process. If not, it can cost workers valuable retirement resources."
 
"This report is a wake-up call that we need stronger consumer protections in the growing 401(k) rollover market. When Americans call up their 401(k) plan provider looking for advice, they shouldn't be inundated with marketing materials masquerading as objective, investor education--but that is exactly what's happening to many individuals," said Senate Health, Education, Labor, and Pensions Committee Chairman Harkin, who has chaired nine Committee hearings on the retirement crisis. "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. We also need to take steps to encourage people to keep their savings in the 401(k) system, including making it simpler to rollover from one 401(k) to another."
 
"Saving for retirement is tough enough, so it's terrible when employees' lose hard-earned money to misleading sales pitches, harmful products or just poor investment advice," said Nelson, who chairs the Senate Special Committee on Aging.  "Decisions about retirement can affect people for the rest of their lives, which is why it's critical they be given timely and accurate information about their options and benefits."
 
The 401(k)-IRA rollover market is the fastest growing part of the U.S. retirement market and represents more than 90 percent of all new funds that flow into IRAs. When workers leave a company with a 401(k), they generally have four possible choices of what to do with their assets: keep the money in their former company's 401(k); rollover to a new employer's 401(k) if the new plan will accept the rollover; rollover to an IRA; or take a lump sum and keep the money, subject to a penalty before age 59 ½.
 
However, GAO found that workers are provided with information from service providers that may be either too complex or without enough detail to make informed decisions about their retirement savings. This may leave workers with a 401(k) confused regarding their options and potentially vulnerable to sales tactics from some service providers who may steer accountholders into products that may not serve the workers' best interest.
 
GAO used undercover investigators to call 30 firms representing the largest service providers in order to understand how service providers market their products to employees with a 401(k). Seven incorrectly said that their IRA was free or there were no fees to open or maintain an IRA.
 
GAO also reviewed the websites of ten large firms and found that five incorrectly said their IRAs were free. In addition, these firms' websites made it difficult to find information regarding rollover options and fees.
 
Listen to the audio of selected phone calls to service providers by GAO investigators.
 
Read GAO's complete report.
 
The full text of the letter to DOL and Treasury is below.
 
 

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 April 3, 2013

The Honorable Jacob J. Lew
Secretary of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

The Honorable Seth D. Harris
Acting Secretary of Labor
Frances Perkins Building
200 Constitution Avenue, NW
Washington, DC 20210

Dear Secretary Lew and Acting Secretary Harris:

Today, we released a Government Accountability Office (GAO) report finding that workers often do not receive uniform or unbiased information when they leave an employer and need to decide what to do with their 401(k) savings. Over 60 million workers depend on 401(k) plans for their retirement security and almost 10 million employees typically change jobs each year.  Rollovers from 401(k)-type plans represent over 90 percent of all new funds that flow into Individual Retirement Accounts (IRAs). This rollover market is the fastest growing part of the American retirement market. This is the employees' money and they should have simple, straightforward and honest information during the rollover process; if not, it can cost them valuable retirement resources.

GAO undercover investigators found consumers are being presented with false and misleading information regarding fees and their options when they leave their jobs. GAO called 30 firms and seven incorrectly said that their IRA was free or there were no fees to open or maintain an IRA. GAO also reviewed the websites of ten large firms and found that five said their IRAs were free. The websites generally had fee information scattered among multiple documents, making it difficult to find and understand.

GAO found that rollover information is either too complex or too basic for a worker to make an informed decision. Neither the Departments of Labor (DOL) nor Treasury has issued comprehensive rules on the timing and substance of information that must be provided to workers on all of their 401(k) account options when they separate from service.

Finally, GAO found that service providers play a large role in the decisions workers make when they leave their jobs. Some call terminating employees and try to sell them an IRA and often try to make it as easy as possible to rollover into an IRA, usually by handling all of the paperwork for workers. These workers may not realize the person they call could just be a salesperson at a call center who is not acting in their best interest.
For most workers, this is their largest financial asset and they have a right to full and fair information on all of their investment options. Service providers should not be permitted to provide incomplete information or steer workers to company investment products.

Given the findings of this report, we call on DOL and Treasury to modify their previous guidance and protect consumers from receiving biased marketing and conflicted advice. We concur with GAO's recommendation that your agencies issue guidance establishing uniform standards, including model notices, when workers terminate service under a 401(k) or similar type account. We call on you to ensure that IRA fees are being fully and fairly disclosed and to inform us if legislation is needed to achieve this goal. Finally, we would like you to make it easier for people to retain or rollover their balances into a 401(k) to reduce pre-retirement cash-outs.

This country is already facing a retirement savings crisis. DOL and Treasury are the lead agencies charged with protecting the retirement security of the American people. We urge your prompt action to protect workers' retirement security in this area.
                            
 
Sincerely,
 
Bill Nelson                                           Tom Harkin                                                         George Miller
Chairman                                             Chairman                                                             Ranking Member       
US Senate Special                            US Senate Health, Education,                     US House Committee on
Committee on Aging                      Labor, and Pensions Committee                Education and the Workforce