An Inside Perspective on Rollover Rulemaking

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.

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.”