Workers encounter confusion and misleading information when they leave their jobs and roll over their retirement money into individual retirement accounts, or IRAs, from company-sponsored 401(k) plans, according to a report released on Wednesday by the Government Accountability Office.
The government watchdog did not name any of the firms where it found misleading practices. Almost all U.S. workers shift money from 401(k) accounts, administered by employers, into IRAs, which must be individually overseen, when they leave a job even though other options are permitted and may be more beneficial, the GAO said.
"The financial services industry spends substantial time and effort into marketing IRAs that may not be in the best interests of account holders," Representative George Miller, Senator Tom Harkin and Senator Bill Nelson said in a statement. The three Democrats requested that the GAO research the rollover issue.
"This comes as no surprise since IRAs often come with higher costs when compared to a 401(k)," the three said.
Harkin is chairman of the Senate Committee on Health, Education, Labor and Pensions; Nelson is chairman of the Senate Special Committee on Aging; and Miller is chairman of the House Committee on Education and the Workforce.
IRAs have become the key retirement savings vehicle for individuals, small business owners, independent contractors and any other worker not covered by a company-sponsored retirement plan. 401(k) plans, on the other hand, are funded by workers, who typically receive matching funds from employers.
The GAO report said 401(k) plan service providers encourage customers to roll over money into IRAs, but may offer little information about other options.
"During our investigator's calls, about a third of call center representatives of 401(k) plan service providers encouraged the caller to roll over 401(k) plan savings from the ex-employer's plan to the service provider's IRA products, and 12 did not mention the option to leave money in the current plan," the GAO said.
IRA assets totaled $5.1 trillion by mid-year 2012, accounting for 28 percent of U.S. retirement assets, according to the Investment Company Institute in Washington, D.C.
Multiple websites reviewed by the GAO also showed that fee disclosure was located in small print in footnotes, sometimes contradicting the main body of information.
"For example, one website stated in the main body of information on fees that it had no fee for selling funds, but a footnote stated that the $49.95 fee would be charged on redemption of funds held for 90 days or less if they were purchased through a proprietary service," the GAO said.
In one rollover application, the schedule of fees was located in the last section of a 49-page supplement, the report said.
Rollovers have become the largest source of contributions to IRAs, the GAO said, citing ICI data.