A report from the Government Accountability Office released April 4 found that workers encounter both confusion and misleading information when they roll over their company-sponsored retirement plans into individual retirement accounts.
And that means an individual may pay thousands of dollars in additional fees, the GAO says. According to the GAO’s findings, some IRA providers may “steer” clients to a product or service that isn’t in their best interest.
When moving on, the worker has the option of taking a payout of the 401(k) and being smacked with taxes, staying put in the plan, rolling over into an IRA or perhaps shifting the money into a 401(k) plan offered by a new employer. But the final option typically involves a time lag.
“Waiting periods to roll into a new employer plan, complex verification procedures to ensure savings are tax-qualified, wide divergences in plans’ paperwork, and inefficient practices
for processing rollovers make IRA rollovers an easier and faster choice, especially given that IRA providers often offer assistance to plan participants when they roll their savings into an IRA,” the GAO says.
Because employers often pick up some fees related to a 401(k) plan, the final option may be the cheapest for the worker. But that information is often not disclosed by service providers promoting IRAs, GAO staff found.
“While IRAs are like 401(k)s in that savers don’t pay taxes on the funds until withdrawal, IRAs tend to have higher associated fees, especially when compared to large employer plans. For example, IRA investors generally pay administrative costs and fees, while many employer-sponsored plans absorb these costs,” CNN Money reports.
“Studies have shown that even a small difference in an investment’s fee ratio can result in the difference of tens of thousands of dollars in retirement savings, when lost earnings are taken into account.”
Employee-funded retirement plans are huge business. The 401(k) plan is the top defined contribution plan in the U. S. In 2010, employers sponsored more than 510,000 401(k) plans with participation from more than 60 million workers. The assets held in these plans surpassed $3.1 trillion, the GAO says.
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