Wed April 3, 2013
When Changing Jobs And Retirement Programs, Good Information Can Be Hard To Find
Originally published on Wed April 3, 2013 7:50 pm
AUDIE CORNISH, HOST:
Let's say you're leaving a job and heading to a new one. You have a 401(k) through your former employer. So now, what do you do with that money? A new study from the Government Accountability Office finds the options are confusing and companies that manage those 401(k)s are not always giving out clear or accurate information, and that can hurt you, the customer, financially. Charlie Jeszeck oversaw the study for the GAO. He's here in our studio. Welcome to the program.
CHARLIE JESZECK: Oh, thank you.
CORNISH: So for a person moving to a new job, what are the options available to them as far as their 401(k)s?
JESZECK: Well, there's really four basic options. The first is, is that the employee can leave their money in their old 401(k) plan. The second is that they can take their money out and roll it over into an IRA or an individual retirement account. They could also simply just cash their money out and spend it, and there are some adverse tax consequences there. And the fourth option is to roll their money over into the 401(k) plan at their new employer.
CORNISH: Now, your study actually found that companies don't always provide the best advice when it comes to 401(k)s or, as you mentioned, IRA. One way you assessed that was by calling the firms. And I take it that the staff of the GAO actually made some calls to money management firms pretending to be people changing jobs, and that their goal was to see what the company's representatives were telling customers. So here's a sample. This - we're going to a hear clip of an unidentified representative for a money management company.
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UNIDENTIFIED MAN: I see, in almost every case, unless you don't have the option, it's almost - it always - almost always makes sense to roll it into an IRA that has no fees, like a no-fee IRA.
CORNISH: So what's wrong with this picture?
JESZECK: Well, just to make clear, what we did hear, we had our undercover people talk to service providers who offered both IRAs but also would offer 401(k) plans at their new employer. So this money was going to stay with the employer in either case. And so in this instance, the first thing is that they push an IRA without knowing the individual's unique financial circumstances. And IRA may or may not be the best situation for them.
Second of all, they said that there were no fees, where, in fact, in many cases, we found that when you look through the information that you get or even on the website that, in fact, there are number of fees that could be assessed depending on the kinds of investment options that you choose. So in that sense, people were being pushed toward something, which might not be in their best financial interests.
CORNISH: Help us understand what's in it for these companies. Why would they want to kind of funnel people towards one kind of account versus another?
JESZECK: Well, in these situations, typically, very often, the service provider will be able to earn higher fees on the individual account as opposed to an account in a 401(k) plan, partially because in a 401(k) plan, you have a lot of accounts bundled together for individual retirement account. It's simply you negotiating with the service provider, if you can call it negotiating at all. And second of all, you have a whole lot less money, so you just don't have as much bargaining power.
CORNISH: And these are also money-making entities. I mean, are they actually doing anything unethical here?
JESZECK: Well, you know, we certainly - we didn't find that. I mean, you know, there's a lot of marketing. And I think that the basic thing here is that we would like to encourage a situation where individual workers can make decisions based on their own financial circumstances and their own knowledge of what's best for them rather than making decisions on what's the easiest because someone will fill out paperwork for them or tell them, oh, this is the way to go and don't worry about those other things.
CORNISH: Now, what are some of the recommendations for addressing this?
JESZECK: One is we'd like to see some standardization of the sponsor practices regarding rollovers.
CORNISH: So right now, everyone does it differently.
JESZECK: Everyone does it differently. There's different forms, different paperwork. They have waiting periods. Sometimes, some 401(k) plans won't even accept account balances from newly hired employees. They just don't want to deal with it. Other plans, when you're separating from a company because you no longer an employee there, they may charge you some higher fees. They sort of want to get you out because, yeah, you don't work for them anymore and then - yet, they still have to look out for your interest.
So they sort of want to encourage people to get out. And sometimes, the new plans don't really want people to come in. And we'd like to see just some standardization there to make it a little easier.
CORNISH: That's Charlie Jeszeck. He's the director of Education, Workforce and Income Security Issues at the GAO. He spoke to us about a new study on 401(k) retirement programs. Charlie Jeszeck, thank you for speaking with us.
JESZECK: Thank you.
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ROBERT SIEGEL, HOST:
This is ALL THINGS CONSIDERED from NPR News. Transcript provided by NPR, Copyright NPR.