401(K) PLANS

Labor and IRS Could 

Improve the Rollover 

Process for 

Participants 

Report to Congressional Requesters

March 2013

GAO-13-30

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-13-30, a report to 

congressional requesters 

March 2013 

401(K) PLANS

Labor and IRS Could Improve the Rollover Process 

for Participants 

Why GAO Did This Study

401(k) plan participants separating 

from their employers must decide what 

to do with their plan savings. Many roll 

over their plan savings to IRAs. As 

GAO previously reported, there is 

concern that participants may be 

encouraged to choose rollovers to 

IRAs in lieu of options that could be 

more in their interests. Because little 

attention has been paid to the 

distribution process, GAO was asked 

to identify challenges separating plan 

participants may face in (1)

implementing rollovers; (2) obtaining 

clear information about which option to 

choose; and (3) understanding 

distribution options. To answer these 

questions, GAO reviewed relevant 

federal laws and regulations, 

interviewed federal officials and 

industry experts, conducted a 

nongeneralizable survey of plan 

sponsors, and made undercover calls 

to 401(k) plan service providers to 

determine what information is provided 

to plan participants. 

What GAO Recommends

Among other things, GAO 

recommends that Labor and IRS 

should take certain steps to reduce 

obstacles and disincentives to planto-plan rollovers. Labor should also

ensure that participants receive 

complete and timely information, 

including enhanced disclosures,

about the distribution options for their 

401(k) plan savings when separating 

from an employer. In response, 

Labor and Treasury generally agreed 

with the findings and will explore 

ways to implement these 

recommendations.

What GAO Found

The current rollover process favors distributions to individual retirement accounts 

(IRA). 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 

Department of Labor (Labor) and the Internal Revenue Service (IRS) provide 

oversight and guidance for this process generally and can take steps to make

plan-to-plan rollovers more efficient, such as reducing the waiting period to roll 

over into a 401(k) plan and improving the asset verification process. Such actions 

could help make staying in the 401(k) plan environment a more viable option, 

allowing participants to make distribution decisions based on their financial 

circumstances rather than on convenience. 

Plan participants often receive guidance and marketing favoring IRAs when 

seeking assistance regarding what to do with their 401(k) plan savings when they 

separate from their employers. GAO found that service providers’ call center 

representatives encouraged rolling 401(k) plan savings into an IRA even with 

only minimal knowledge of a caller’s financial situation. Participants may also 

interpret information about their plans’ service providers’ retail investment 

products contained in their plans’ educational materials as suggestions to choose 

those products. Labor’s current requirements do not sufficiently assist 

participants in understanding the financial interests that service providers may 

have in participants’ distribution and investment decisions. 

In addition to being subject to inefficient rollover processes and the marketing of 

IRAs, 401(k) plan participants separating from their employers may find it difficult 

to understand and compare all their distribution options. Information participants 

currently receive is either too generic and without detail, leaving participants 

without understanding of the key factors they need to know to make decisions 

about their savings, or too long and technical, leaving participants overwhelmed 

and confused. Labor regulations do not ensure that 401(k) plans provide 

complete and timely information to participants on all their distribution options.

Industry experts told GAO that participants could benefit from simplified, concise, 

and standardized information. 

Separating 401(k) Plan Participants Generally Have Up to Four Options for Their Plan Savings 

View GAO-13-30. To view a video of GAO’s 

calls to 401(k) service providers see 

www.gao.gov/multimedia/video/GAO-13-30/1

For more information, contact Charles Jeszeck 

at (202) 512-7215 or jeszeckc@gao.gov. 
Page i GAO-13-30 401(k) Plans

Letter 1 

Background 3

Direct Rollover Process Can Be Inefficient and Encourages 

Participants to Choose the IRA Option 17

Participants Are Subjected to Pervasive Marketing of IRAs, but 

May Receive Limited Assistance Regarding Their Distribution 

Options 22

Participants Face Challenges in Making Rollover Decisions 29

Conclusions 44

Recommendations for Executive Action 47

Agency Comments and Our Evaluation 48

Appendix I Objectives, Scope, and Methodology 52

Appendix II IRS Model 402(f) Special Tax Notice 56

Appendix III Comments from the Department of Labor 64

Appendix IV Comments from the Department of the Treasury 67

Appendix V GAO Contact and Staff Acknowledgments 70

Tables

Table 1: Two Types of IRAs 7

Table 2: Summary of Final Rules for Labor’s Disclosure Initiatives 14

Table 3: Some Key Differences between 401(k) Plans and IRAs to 

Consider When Making Distribution Decisions 30

Figures

Figure 1: Separating 401(k) Plan Participants Generally Have Up to 

Four Options for Their Plan Savings 8

Contents 
Page ii GAO-13-30 401(k) Plans

Figure 2: Two Ways 401(k) Plans May Process Direct Rollovers to a 

New Plan 20

Figure 3: One Example of a 401(k) Plan Service Provider Using 

Distribution Information as a Venue to Promote Their 

Own Retail IRA Product 24

Figure 4: Examples of 401(k) Plan Service Providers (Who May or 

May Not Be Fiduciaries) Giving a Potential Plan 

Participant Guidance Favoring IRAs 27

Figure 5: IRA Rollover Decisions Involve Several Complex 

Investment Choices 33

Figure 6: Number of Pages in One IRA Rollover Application and 

Associated Investment Research 34

Figure 7: The Most Frequently Used Words in One IRA Rollover 

Application and Target Date Fund Prospectus 35

. 
Page iii GAO-13-30 401(k) Plans

Abbreviations

EBSA Employee Benefits Security Administration 

ERISA Employee Retirement Income Security Act of 1974 

FINRA Financial Industry Regulatory Authority 

ICI Investment Company Institute

IRA individual retirement account

IRC Internal Revenue Code

IRS Internal Revenue Service

Labor Department of Labor

SEC Securities and Exchange Commission

Treasury Department of the Treasury

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-13-30 401(k) Plans

United States Government Accountability Office

Washington, DC 20548

March 7, 2013

The Honorable Tom Harkin

Chairman

Committee on Health, Education, Labor

and Pensions

United States Senate

The Honorable Bill Nelson

Chairman

Special Committee on Aging

United States Senate

The Honorable George Miller

Ranking Member

Committee on Education and the

Workforce

United States House of Representatives

When participants in employer-sponsored 401(k) plans separate from an 

employer, rolling their funds into an individual retirement account (IRA) is 

one of several options available to them. Rollovers to IRAs from 401(k) 

plans are a common investment choice for plan participants and they are 

frequently advertised on television and in multiple venues.1 Rollovers 

from 401(k) plans and other employer-sponsored retirement plans are so 

prevalent that they are the predominant source of contributions to IRAs. 

Approximately 95 percent of money contributed to traditional IRAs in 2008 

was from rollovers, primarily from employer-sponsored retirement plans.2

 

1 For the purpose of this report, “rollover” generally refers to a distribution from a 401(k) 

plan that an individual moves into another employer-sponsored retirement plan or IRA, in 

order to avoid the funds being considered income and, thereby, immediately subject to 

income tax. Amounts taken from IRAs are generally referred to as “withdrawals,” but to 

minimize confusion, in this report we use the term “distribution” with respect to IRAs as 

well as 401(k) plans. 

Yet, the choice to roll over 401(k) plan savings into an IRA may or may 

not be in the best interest of participants depending on their individual 

2 In this case, employer-sponsored retirement plans included defined contribution and 

defined benefit plans. Investment Company Institute, The U.S. Retirement Market, Second 

Quarter 2012 (September 2012). http://www.ici.org/info/ret_12_q2_data.xls. 

 
 

Page 2 GAO-13-30 401(k) Plans

circumstances. Despite the growth in IRA rollovers, very little is known 

about how the distribution process of 401(k) plan savings came to be 

centered on rolling savings into an IRA. Our past work has highlighted 

concern that 401(k) plan participants may be encouraged to roll over plan 

balances to IRAs without understanding or considering other options. 

Consequently, you asked that we identify some of the challenges plan 

participants separating from their employers may face.

This report examines the challenges plan participants face in (1) 

implementing a rollover, including plan-to-plan rollovers;3

To answer these objectives we used a variety of data collection methods. 

To understand the rollover marketplace, we reviewed relevant research 

and data from a variety of academic and industry-based sources. To 

understand the extent of laws and regulations on the rollover process, we 

reviewed federal laws and regulations pertaining to 401(k) plans and 

IRAs; met with government officials from the Department of Labor 

(Labor), the Department of the Treasury (Treasury), the Internal Revenue 

Service (IRS), and the Consumer Financial Protection Bureau; and met 

with 401(k) plan service providers (many of which offer retail IRAs), 

401(k) plan sponsors, and other experts. To understand the role of 401(k) 

plan service providers in participants’ decision-making processes, we 

conducted 29 structured interviews with 401(k) plan service providers, 

including those with the largest assets under management. In addition, 

working with three industry-based membership organizations, we 

collected written responses to questions used in our interviews from 25 

additional service provider firms. (See appendix I for more information.) 

To understand the role and perspectives of 401(k) plan sponsors with 

regard to the rollover process, we conducted a non-generalizable survey, 

facilitated through two member organizations: PLANSPONSOR and the 

Society for Human Resource Management. We received a total of 76 

responses to our survey and we also interviewed five plan sponsors. To 

assess the content and availability of information available to individuals, 

we reviewed 10 IRA providers’ websites for account fees and rollover 

(2) getting 

accurate and clear information about which distribution option to choose 

for their 401(k) plan retirement savings; and (3) understanding their 

distribution options. 

 

3 In this report we refer to a rollover from a 401(k) plan to another employer-sponsored 

retirement plan as a “plan-to-plan rollover.” 
 

Page 3 GAO-13-30 401(k) Plans

promotions. We also investigated the guidance and information that plan 

service providers give to individuals through calls placed by our 

investigative unit to 30 401(k) plan service providers representing those 

with the largest 401(k) assets under management. 27 of the 30 service 

providers also offer IRAs, including those with the largest IRA assets 

under management. During the calls our investigator asked about rollover 

options and processes, and IRA costs. In addition, we used research and 

data from a variety of pension and investment industry-based sources to 

answer our research questions. Though much of the data we obtained 

are not generalizable, together they provide a rich source of relevant 

information. For more information on the data and other methodologies 

we used see appendix I.

We conducted this performance audit from May 2011 to March 2013 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for findings and 

conclusions based on our audit objectives. We conducted our related 

investigative work in accordance with standards prescribed by the Council 

of Inspectors General on Integrity and Efficiency.

Congress has established tax incentives to encourage employers to 

sponsor retirement plans and employees to participate in them.4 Under 

the Employee Retirement Income Security Act of 1974 (ERISA),5

employers may sponsor two broad types of retirement plans, referred to 

in ERISA as pension plans:6 (1) defined benefit plans,7

 

4 Employer contributions to qualified plans are a tax-deductible business expense, and, in 

general, contributions and investment earnings on those contributions are not taxed as 

income until the employee withdraws them from the plan. 

which promise to 

5 Pub. L. No. 93-406, 88 Stat. 829 (codified as amended at 29 U.S.C. §§ 1001-1461).

6 29 U.S.C. § 1002(2).

Background 

401(k) Plans
 

Page 4 GAO-13-30 401(k) Plans

provide benefits generally based on an employee’s years of service and 

frequently are based on salary, regardless of the performance of the 

plans’ investments, and (2) defined contribution plans, in which benefits 

are based on contributions and the performance of the investments in 

participants’ individual accounts.8

Over the last three decades, employers have shifted away from 

sponsoring defined benefit plans and toward defined contribution plans. 

The 401(k) plan is the predominant type of defined contribution plan in the 

United States. In 2010, employers sponsored over 510,000 401(k) plans 

with participation from over 60 million workers.9 The assets held in these 

plans totaled more than $3.1 trillion.10

Typically, 401(k) plans allow participants to specify the size of their 

contributions and direct those contributions, as well as any made by their 

employer, to one or more investments among the options offered within 

the plan. Investment choices within the plan generally include options 

such as mutual funds, target date funds (which are designed to reduce 

the risk of investment losses as a participant approaches their “target” 

retirement date), stable value funds (which are designed to preserve the 

participants’ contributions, or their principal, while also providing steady 

positive returns), company stock, and money market funds. Industry 

research shows that, as of the end of 2009, participants had allocated 

about 41 percent of 401(k) plan assets to equity funds, a type of mutual 

fund that mainly invests in stocks, followed by a mix of other investments, 

including company stock and stable value funds.11

 

7 29 U.S.C. § 1003(35).

When deciding how to 

allocate assets among the various investment options, experts generally 

advise that participants consider a number of factors, such as historical 

performance, investment risk, fees associated with each option, and 

various individual circumstances, such as the time horizon to retirement. 

As we have previously reported, even a seemingly small fee, such as a 1 

8 29 U.S.C. § 1002(34). 

9 See U.S. Department of Labor Employee Benefits Security Administration, Private 

Pension Plan Bulletin: Abstract of 2010 Form 5500 Annual Reports, Version 1.0 

(Washington, D.C.: November 2012).

10 Ibid.

11 Employee Benefit Research Institute, 401(k) Plan Asset Allocation, Account Balances, 

and Loan Activity in 2009 (Washington, D.C.: November 2010).
 

Page 5 GAO-13-30 401(k) Plans

percent annual charge, can significantly reduce 401(k) plan savings over 

the course of a participant’s career.12

Plan sponsors often hire companies to provide the services necessary to 

operate their 401(k) plans.13

Individual retirement accounts—popularly known as IRAs—have grown in 

importance and have become key retirement savings vehicles for many 

individuals, including small business owners, independent contractors, 

and other workers not covered by an employer-sponsored pension plan. 

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 (ICI).

Some of these services—such as investment 

management, consulting and providing financial advice, recordkeeping, 

and custodial or trustee services for plan assets—are provided directly to 

plan sponsors. Services are also provided to participants, such as offering 

financial advice, assisting with processing transactions, or providing 

educational information. Advisory services for participants can be 

provided through a variety of methods, including call centers or help 

desks, group seminars, one-on-one sessions, computer models, or 

brochures and other printed materials.

14

 

12 GAO, Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the 

Department of Labor Better Information on Fees, 

Created by ERISA, traditional IRAs were established to 

(1) provide a way for individuals not covered by a pension plan to save for 

retirement, and (2) give retiring workers or individuals changing jobs a 

way to preserve assets from employer-sponsored retirement plans by 

allowing them to roll over, or transfer, plan balances into IRAs.

GAO-07-21 (Washington, D.C.: Nov. 16, 

2006).

13 For more information on 401(k) plan service provider arrangements and fees see GAO, 

401(k) Plans: Increased Educational Outreach and Broader Oversight May Help Reduce 

Plan Fees, GAO-12-325 (Washington, D.C.: Apr. 24, 2012).

14 U.S. retirement market assets are composed of assets in IRAs, defined contribution 

plans, private-sector defined benefit plans, state and local government pension plans, 

federal pension plans, and annuity reserves. In 2012, total U.S. retirement market assets 

were over $18 trillion, according to estimates from the Investment Company Institute, The 

U.S. Retirement Market, Second Quarter 2012 (September 2012),

http://www.ici.org/info/ret_12_q2_data.xls. 

Individual Retirement Accounts
 

Page 6 GAO-13-30 401(k) Plans

Additionally, the Taxpayer Relief Act of 1997 created Roth IRAs.15 These 

two types of IRAs are described in table 1.

 

15 Pub. L. No. 105-34, § 302(a), 111 Stat. 788, 825-28 (codified as amended at 26 U.S.C. 

§ 408A). There are also two types of employer-sponsored IRAs—Simplified Employee 

Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) (referred to in 

the IRC as a simple retirement account). 26 U.S.C. § 408(k) and (p), respectively. Under 

SEP IRAs, employers of any size make voluntary tax deductible contributions to traditional 

IRAs for themselves and their employees. Under SIMPLE IRAs, small employers match 

part of participating employees’, generally tax-deductible, contributions, or make 

contributions for all eligible employees based on a fixed percentage of pay, to traditional 

IRAs. Contributions to all IRAs may not exceed certain limits. For more information on 

these types of plans, see GAO, Individual Retirement Accounts: Government Actions 

Could Encourage More Employers to Offer IRAs to Employees, GAO-08-590

(Washington, D.C.: June 4, 2008). Employers can also offer both traditional and Roth 

IRAs established as payroll-deduction IRAs (also called payroll-deduction IRA programs). 

Through payroll-deduction IRAs, employees may establish and contribute to traditional or 

Roth IRAs through voluntary deductions from their pay, which are forwarded by the 

employer to the employee’s IRA. As long as employers follow guidelines set by Labor for 

managing the payroll-deductions, such arrangements are not considered pension plans 

and employers are not, therefore, subject to the fiduciary standards under ERISA. Each of 

these IRAs has its own eligibility requirements. 29 C.F.R. § 2509.99-1 (also known as 

Interpretive Bulletin 99-1). In addition, employers may offer “deemed IRAs” to their 

employees, which allow employees to keep IRA assets in their employer’s tax-qualified 

retirement plan as separate, traditional or Roth, IRAs. 26 U.S.C. § 408(q). Employees 

make voluntary contributions to the deemed IRA, subject to IRA rules. According to 

Treasury, few deemed IRAs exist.
 

Page 7 GAO-13-30 401(k) Plans

Table 1: Two Types of IRAs

Traditional IRAs

26 U.S.C. § 408 

(a), (d) and (o).

Eligible individuals may make tax-deductible contributions but 

distributions after age 591⁄2, when individuals are more likely to be 

retired and in a lower tax bracket, are generally subject to income 

tax. Distributions made before age 591⁄2, other than under specific 

exceptions,a are also subject to income tax, but in addition, are 

generally subject to a tax equal to 10 percent of the distribution. 

Any individual may make non-deductible contributions and, in such 

cases, after age 591⁄2, only the portion of distributions derived from 

investment earnings is subject to income tax. Yearly contribution 

amounts are subject to limits based, for example, on income and 

pension coverage. Retirees over age 701⁄2 cannot make additional 

contributions and must begin receiving required minimum 

distributions. 

Roth IRAs

26 U.S.C. § 408A.

Eligible individuals may make contributions that are not taxdeductible but after 5 years distributions made after age 591⁄2 are 

not subject to income tax (beyond what was already paid on 

contributions). The portion of distributions made before age 591⁄2 

derived from investment earnings are generally subject to income 

tax and, generally, an additional tax equal to 10 percent of that 

portion. Yearly contributions are subject to limits based, for 

example, on income, filing status and any contributions to a 

traditional IRA. There are, however, no age limits on contributing 

and no distributions are required during the individual’s lifetime. 

Source: GAO analysis.

a These exceptions include, for example, withdrawals for certain higher education expenses and first 

home purchase. 26 U.S.C. § 72(t)(2)(E) and (F).

When 401(k) plan participants separate from their employers, they 

generally have up to four options for their plan savings: leave the money 

in the plan, roll or move the money into a new qualified employer plan, roll 

Rollover Process 
 

Page 8 GAO-13-30 401(k) Plans

the money into an IRA, or take a lump sum distribution (“cash out”16).17

Figure 1: Separating 401(k) Plan Participants Generally Have Up to Four Options for Their Plan Savings

(See figure 1.)

Note: Plans are not always required to permit separated participants to leave funds in the plan once 

they separate from employment if the balance is less than $5,000 or if the participant attains the later 

of age 62 or the normal retirement age. Plans are also not required to accept rollovers. Participants 

must check with the new plan’s administrator to determine if the plan permits rollovers into the plan. 

In some cases, participants may be offered the option to annuitize their 401(k) plan savings at annuity 

purchase rates offered through the plan if they are retiring. However, after such a purchase, 

participants typically are no longer plan participants and their annuity benefit is the responsibility of 

the insurance company from which the annuity is purchased.

 

16 We use the term “cash out” to refer to a lump-sum distribution made to an employee at 

job separation that is not subsequently rolled over into a qualified employer plan or IRA. 

For more information on the effects of cash outs see GAO, 401(k) Plans: Policy Changes 

Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings, 

GAO-09-715 (Washington, D.C.: Aug. 28, 2009). 

17 Not all plans accept rollovers from other plans. For detailed information on rollover 

eligibility for different plans, see http://www.irs.gov/pub/irs-tege/rollover_chart.pdf. In some 

circumstances plan participants may choose a combination of options, such as leaving a 

portion of assets in the plan and taking a partial distribution. However, some participants 

have more limited options, and some plans automatically distribute plan balances under 

$5,000 to separating participants, although plans are prohibited from immediately 

distributing such balances without consent. 26 U.S.C. § 411(a)(11)(A). If a participant 

elects to have a mandatory distribution rolled over to a specific IRA, however, plans are 

required to make a direct rollover to that IRA. For mandatory distributions between $1,000 

and $5,000, even if participants make no such elections, plans must automatically roll 

such distributions into an IRA on their behalf. 26 U.S.C. § 401(a)(31). Labor has a safe 

harbor regulation to guide plan fiduciaries in making such automatic rollovers. 29 C.F.R. § 

2550.404a-2 (2012). Any money rolled over to a Roth IRA that was not previously in a 

designated Roth account in a plan will count towards an individual’s gross annual income. 

Notice 2009-75, 2009-39 I.R.B. 436. 
 

Page 9 GAO-13-30 401(k) Plans

The first three options allow a participant to preserve the tax-deferred 

status of their plan savings. In contrast, the Internal Revenue Code (IRC) 

imposes an additional tax of 10 percent (in addition to ordinary income 

tax) on cash outs made from qualified retirement plans, which includes 

401(k) plans and IRAs, before a participant reaches age 591⁄2,18 in order 

to discourage the use of plan funds for purposes other than retirement 

and ensure that the favorable tax treatment for plan funds is limited to 

those that are, in fact, used to provide retirement income.19 In addition, 

employers must withhold 20 percent of the cash outs to cover anticipated 

income tax.20

A 401(k) plan can complete a direct rollover21 in either of two ways: (1) by 

sending the funds directly to the new employer’s retirement plan or to an 

IRA, or (2) by mailing the departing participant a check that must be made 

payable to the new plan or IRA, and that the participant then has to 

deliver to the new plan or IRA. An indirect rollover involves the current 

(soon to be former) 401(k) plan issuing the departing participant a check, 

payable to the participant, who then has 60 days from the date of receipt 

to either cash the check and write a new check to the new employer’s 

retirement plan or an IRA, or endorse the distribution check and mail it to 

the new employer’s retirement plan or an IRA.22

 

18 26 U.S.C. § 72(t). The IRC exempts certain early distributions, such as those made to a 

participant after separation from service with an employer after reaching age 55. 26 

U.S.C. § 72(t)(2)(A)(v). For more information on exemptions from early distributions see

A plan could also send 

the distributed funds electronically to a participant’s bank account and the 

new retirement plan or IRA might allow the participant to electronically 

transfer the funds into their new account. As a cash distribution, the 20 

percent withholding for anticipated taxes applies, but the regular income 

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Taxon-Early-Distributions and 

http://www.irs.gov/file_source/pub/irs-tege/early_distributions.pdf. 

19 As regular income distributions, these early distributions are also subject to federal 

income tax withholding and taxed at the marginal income tax rate.

20 26 U.S.C. § 3405(c)(1)(B).

21 A direct rollover is when a participant specifies the plan or IRA to which their distribution 

should be transferred. The plan can transfer the money via non-transferable check made 

out to the receiving entity or electronically. The ability to transfer money electronically 

depends on the ability and policy of the distributing and receiving entities. Indirect rollovers 

are rollovers that are not direct rollovers.

22 26 U.S.C. § 402(c)(3). 
 

Page 10 GAO-13-30 401(k) Plans

tax and additional 10 percent tax do not apply to the funds rolled into a 

new employer plan or IRA. The implications of these alternative 

procedures are discussed later in this report.

While many participants take distributions from plans when they separate 

from employment, others may wait to take such distributions at a later 

date. For instance, industry data on participants in defined contribution 

plans aged 60 years and over who separated from employment in 2004 

show that about 50 percent of their plan savings remained in employer 

plans 1 year after separating, but only about 20 percent of their plan 

savings remained in the plans 5 years after separating.23

Rollovers have become the largest source of contributions to IRAs. 

According to ICI, from 1996 to 2008, over 90 percent of funds flowing into 

traditional IRAs came from rollovers primarily from employer-sponsored 

retirement plans.24 ICI reported that, in 2012, 51 percent of the traditional 

IRAs held by 20 million U.S. households included rollover funds.25

401(k) plans are subject to various provisions of ERISA, which are 

generally enforced by Labor’s Employee Benefits Security Administration 

(EBSA) and Treasury’s Internal Revenue Service (IRS). ERISA was 

enacted to, among other things, protect the interests of plan participants 

and their beneficiaries and set minimum standards for most private sector 

pension plans.

In 

2012, for 47 percent of households with traditional IRA accounts that 

included rollover funds, rollover funds from employer-sponsored 

retirement plans accounted for 75 percent or more of the account 

balance. Furthermore, the market for rollover dollars is large and 

competitive. Numerous reports and news articles that we reviewed 

address “rollover opportunities” and include strategies for retaining and 

capturing assets rolling out of plans.

26

 

23 Stephen P. Utkus and Jean A. Young, Distribution Decisions Among Retirement-age 

Defined Contribution Plan Participants, The Vanguard Group, Inc. (December 2010).

To carry out its responsibilities, EBSA issues regulations 

24 Investment Company Institute, The U.S. Retirement Market, Second Quarter 2012 

(September 2012), http://www.ici.org/info/ret_12_q2_data.xls. 

25 In 2012, the median value of traditional IRAs with rollover funds was $62,500, 

compared with $30,000 for those without rollovers funds. Sarah Holden and Daniel 

Schrass, The Role of IRAs in U.S. Households’ Saving for Retirement, 2012, ICI Research 

Perspective 18, no. 8 (December 2012). Available at www.ici.org/pdf/ per18-08.pdf.

26 29 U.S.C. §§ 1001b(a) and 1003(a), respectively.

Oversight of 401(k) Plans 
 

Page 11 GAO-13-30 401(k) Plans

and other guidance, conducts investigations of plan fiduciaries and 

service providers, and seeks appropriate remedies to correct violations of 

the law. To assist regulated parties in complying with ERISA, EBSA also 

educates plan participants, beneficiaries, and plan sponsors. ERISA 

established standards of conduct for plan fiduciaries, which include plan 

sponsors.27 Fiduciaries generally must act solely in the interest of plan 

participants and beneficiaries for the exclusive purpose of providing plan 

benefits and defraying the expense of plan administration.28

Depending on the functions that service providers perform for a plan, they 

may also be plan fiduciaries and are then subject to the same standards 

outlined in ERISA and its regulations. When providing assistance to 

participants, a service provider may furnish investment advice or 

investment education. Investment advice, under a current Labor 

regulation, consists of investment recommendations provided on a 

regular basis, and with both parties understanding that the 

recommendations are individualized and will serve as the primary basis 

for investment decisions.29 Investment education consists of general 

investment information, including general information about the plan and 

asset allocation models that is not tailored to the needs or interests of an 

individual plan participant. In a 2005 advisory opinion under this 

regulation, however, Labor took the view that advice to take an otherwise 

permissible distribution, even if combined with a recommendation on how 

to invest it, would not trigger fiduciary status, unless the person providing 

such recommendations were already an ERISA fiduciary.30

 

27 Under ERISA, persons are generally fiduciaries with respect to 401(k) plans, to the 

extent they exercise any discretionary authority or control over plan management or any 

authority or control over the management or disposition of plan assets, render investment 

advice respecting plan money or property for a fee or other compensation (or have the 

authority or responsibility to do so), or have discretionary authority or responsibility for 

plan administration. 29 U.S.C. § 1002(21)(A).

Furthermore, 

28 29 U.S.C. § 1104(a). 

29 In June 1996, EBSA issued an interpretive bulletin defining participant investment 

education, 61 Fed. Reg. 29,586, 29,589-90 (June 11, 1996) (codified at 29 C.F.R. § 

2509.96-1(c) and (d)(2012)). The bulletin identified specific categories of investmentrelated information that, when furnished to plan participants or beneficiaries, would not 

constitute the rendering of investment advice under ERISA. The categories of information 

include the following: plan information; general financial and investment information; asset 

allocation models; and interactive investment materials.

30 Advisory Op. 2005-23A (Dec. 7, 2005).
 

Page 12 GAO-13-30 401(k) Plans

Labor’s interpretive bulletin relating to participant investment education 

indicates that service providers may use their own retail investment 

products as examples in informational materials for plan participants 

without such information constituting investment advice, as long as 

certain required statements are made in the materials.31

On October 22, 2010, Labor proposed a revision to its definition of an 

ERISA “fiduciary” to account for changes in the financial industry and the 

expectations of plan officials and participants who receive investment 

advice.32 The proposed regulation would have reduced the number of 

conditions that need to be met to be deemed an ERISA fiduciary and 

permitted oversight with respect to a broader range of service providers. 

The preamble to the proposed revised definition notes that, as a general 

matter, a recommendation to a plan participant to take an otherwise 

permissible distribution does not constitute investment advice within the 

meaning of the current regulation even when that advice is combined with 

a recommendation as to how the distribution should be invested. It also 

notes, however, concerns that plan participants may not be adequately 

protected from advisers who provide distribution recommendations that 

subordinate participants’ interests to the advisers’ own interests. 

Comments on the proposed rule, specifically including on whether and to 

what extent the final regulation should define the provision of investment 

advice to encompass recommendations related to taking a plan 

distribution, were originally due at Labor on or before January 20, 2011, 

but that deadline was extended two weeks to February 3, 2011.

33

In March 2011, EBSA held a hearing to consider issues attendant to 

adopting its proposed rule on when a person is considered to be an 

ERISA fiduciary by reason of giving investment advice to an employee 

benefit plan or to a plan’s participants and beneficiaries. In September 

2011, citing requests from the public, including members of Congress, 

that Labor allow an opportunity for more input on the rule, Labor 

announced that it would withdraw its October 22, 2010 proposed rule. 

 

31 29 C.F.R. § 2509.96-1(d)(3) (2012).

32 75 Fed. Reg. 65,263. 

33 76 Fed. Reg. 2,142, 2,143. Labor officials said the department received many 

comments, both pro and con, on whether the provision of investment advice should 

include recommendations to take a distribution and the effect of coupling such a 

recommendation with advice as to investing any distribution.
 

Page 13 GAO-13-30 401(k) Plans

Labor indicated, at that time, that it would repropose its rule on the 

definition of a fiduciary in early 2012, but as yet has not done so. Labor 

currently anticipates that its reproposal will be issued in 2013.

In addition, the IRC sets out standards that 401(k) plans must meet to 

receive preferential tax treatment, and these are enforced by the IRS, as 

described in greater detail below.

The IRS has primary responsibility for ensuring that 401(k) plans and 

IRAs meet IRC requirements, related to, for example, their establishment 

and operation, as necessary to qualify for the preferential tax treatments 

available to them.34 The IRS is also responsible for imposing a tax on 

disqualified persons (which includes, for example, plan sponsors or

service providers) who engage in certain prohibited transactions 

indicative of self-dealing or conflicts of interest with plans, while in the 

case of an IRA, this tax is not imposed but the IRA’s favorable tax 

treatment is eliminated.

35

Based on ERISA provisions generally prohibiting pension plans from 

engaging in largely the same transactions that subject disqualified 

persons to taxation,

Such prohibited transactions specifically 

include, for example, borrowing money from an IRA, selling property to an 

IRA, receiving unreasonable compensation from an IRA for managing the 

account, using an IRA account as security for a loan, and buying property 

for personal use with IRA funds.

36 Labor shares responsibility for enforcing prohibited 

transaction requirements with IRS and, under Reorganization Plan No.4 

of 1978, has the authority to apply the statutory exemptions and grant 

additional exemptions under certain circumstances.37

 

34 26 U.S.C. §§ 401-415. Such requirements include, for example, participation, vesting, 

and funding standards. 

If an individual for 

whom an IRA was established engages in a prohibited transaction, such 

as using the IRA as security for a loan or buying property for personal use 

35 26 U.S.C. § 4975. 

36 29 U.S.C. § 1006.

37 5 U.S.C. App. Statutory exemptions generally include, for example, certain loans to

participants or beneficiaries, the provision of services needed to operate a plan for 

reasonable compensation, loans to employee stock ownership plans, and investment with 

certain financial institutions regulated by other state or federal agencies. 26 U.S.C. § 

4975(d) and 29 U.S.C. § 1108(b).

Enforcement of IRA 

Requirements
 

Page 14 GAO-13-30 401(k) Plans

with IRA funds, the IRA loses its status as an IRA and is therefore 

disqualified from favorable tax treatment.38

Other recent regulatory initiatives focus on enhanced disclosure to plan 

fiduciaries and plan participants. These regulations, as described in table 

2, enhance the disclosure of plan financial information related to fees and 

other arrangements involving plan fiduciaries and participants.

Table 2: Summary of Final Rules for Labor’s Disclosure Initiatives

Reasonable Contract or Arrangement Under 

Section 408(b)(2)–Fee Disclosure,

77 Fed. Reg. 5632, 5655-58 (Feb. 3, 2012) 

(codified at 29 C.F.R. § 2550.408b-2(c) (2012)) 

ERISA prohibits contracts between a plan and a party in interest unless they are 

reasonable, services provided under them are necessary to the plan, and no more

than reasonable compensation is paid for those services. 29 U.S.C. §§

1106(a)(1)(C) and 1108(b)(2). Regulations effective July 1, 2012 prescribe 

disclosures about service fees, among other things, that must be furnished to plan 

fiduciaries, such as plan sponsors, in order for contracts to be considered 

reasonable.

Fiduciary Requirements for Disclosure in 

Participant-Directed Individual Account Plans, 

75 Fed. Reg. 64,910, 64,937-46 (Oct. 20, 2010) 

(codified as amended at 29 C.F.R. §§ 2550.404a5 and 2550.404c-1 (2012)) 

Where plan participants and beneficiaries are responsible for allocation and 

investment of their plan assets, as in 401(k) plans, plan sponsors and other 

fiduciaries must take steps to ensure that participants and beneficiaries are 

regularly made aware of those responsibilities and provided sufficient plan 

information, including information about fees and expenses, to make informed 

decisions regarding management of their accounts. Regulations effective Dec. 20, 

2010, prescribe specific fiduciary requirements for disclosures that plan 

administrators must provide in order for participants and beneficiaries to have 

sufficient plan information. 

Source: GAO analysis of Labor regulations.

The specific investment products held in 401(k) plans and IRAs, as well 

as the various financial professionals that service them, are subject to 

oversight from applicable securities, banking, or insurance regulators, 

which can include both federal and state regulators. For example, mutual 

funds, offered in both plans and IRAs, are generally regulated by the 

Securities and Exchange Commission (SEC), which requires funds to 

disclose fees and to inform investors of products’ potential risks. An 

investment adviser provides a wide range of investment advisory 

services, including management of client portfolios. Investment advisers 

manage the portfolios of individuals as well as the portfolios of pension 

funds and mutual funds. Broker-dealers provide brokerage services 

where they act as an agent for someone else; a dealer acts as a principal 

 

38 26 U.S.C. § 408(e)(2). As a result, any funds not previously taxed will be subject to 

income tax but not to the tax otherwise imposed in the case of prohibited transactions. 26 

U.S.C. § 4975(c)(3).

Labor’s Recent Fee Disclosure 

Requirements 

Other Rules Affecting 401(k) 

Plan and IRA Investments
 

Page 15 GAO-13-30 401(k) Plans

for its own account. SEC has primary responsibility for oversight of 

investment advisers and broker-dealers, while those who sell insurance 

products are also subject to state insurance regulation.39

According to SEC, all investment advisers—whether registered with SEC 

or not—have a fiduciary obligation under the Investment Advisers Act of 

1940, which includes duties of loyalty and care and to serve the best 

interests of its clients.

Investment 

advisers, broker-dealers, and insurance agents are subject to different 

standards of practice, and for anyone servicing a 401(k) plan ERISA 

standards may also apply. 

40 As part of its fiduciary duty, the investment 

adviser is required to avoid conflicts of interest and, at a minimum, make 

full disclosure of material conflicts of interest to their clients. When an 

adviser fails to disclose information regarding material conflicts of interest, 

clients are unable to make informed decisions about entering into or 

continuing the advisory relationship. SEC also regulates broker-dealers 

under the Securities Exchange Act of 1934, which generally requires that 

broker-dealers register with SEC, unless an exception or exemption 

applies.41

 

39 State securities authorities have primary regulatory authority over investment advisers 

with less than $100 million of assets under management. For a more detailed discussion 

of securities regulation see GAO, Financial Regulation: Industry Changes Prompt Need to 

Reconsider U.S. Regulatory Structure, 

In addition, broker-dealers that deal with the public generally 

must become members of the Financial Industry Regulatory Authority, 

Inc. (FINRA). Under the anti-fraud provisions of the federal securities 

laws, broker-dealers are required to deal fairly with their customers and 

meet a suitability standard when rendering investment 

GAO-05-61 (Washington, D.C.: Oct 6, 2004) and 

GAO, Consumer Finance: Regulatory Coverage Generally Exists for Financial Planners, 

but Consumer Protection Issues Remain, GAO-11-235 (Washington, D.C.: Jan 18, 2011).

40 Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 – 80b-21. The Advisers Act 

defines an investment adviser as any person (i.e., individual or firm) who is in the business 

of providing advice, or issuing reports or analyses, regarding securities, for compensation. 

15 U.S.C. § 80b-2(a)(11); IA Rel. No. 1092. 

41 15 U.S.C. §§ 78a – 78pp. Broker-dealers are regulated by FINRA and by SEC under 

the federal securities laws and FINRA rules.
 

Page 16 GAO-13-30 401(k) Plans

recommendations.42

The Dodd-Frank Wall Street Reform and Consumer Protection Act 

requires the SEC to conduct a study on the effectiveness of the existing 

standards of care for broker-dealers and investment advisers.

Consequently, when a broker-dealer makes a 

recommendation to buy, exchange, or sell a security to a retail investor, 

that broker-dealer must recommend only those securities that the broker 

reasonably believes are suitable for the customer. In addition, a brokerdealer must disclose all material information regarding the security and 

the recommendation, including, among other things, any material conflicts 

of interest. Additionally, broker-dealers are restricted from participating in 

certain transactions that present particularly acute potential conflicts of 

interest.

43

 

42 The major securities industry self-regulatory organizations, such as FINRA, impose 

suitability rules that members must follow. For example, under former National Association 

of Securities Dealers Conduct Rule 2310, a FINRA member making an investment 

recommendation to a customer must have grounds for believing that the recommendation 

is suitable for that customer’s financial situation and needs. In August 2010, FINRA 

proposed new consolidated rules governing the suitability obligations and know-yourcustomer obligations of its members. The new rules retain the core features of the current 

rules, while modifying both rules to strengthen and clarify them. On November 17, 2010, 

SEC approved the rule changes with slight modifications. Exchange Act Release No. 

63325, 75 Fed. Reg. 71479 (Nov. 23, 2010). The new rule was effective on July 9, 2012.

Based on 

its review, SEC staff recommended that SEC propose rules that apply a 

uniform standard of conduct which requires broker-dealers and 

investment advisers, when providing personalized investment advice to 

retail customers, to act in the best interest of the customer without regard 

to the financial or other interest of the broker, dealer, or investment 

adviser. SEC staff also recommended that SEC should facilitate the 

provision of uniform, simple, and clear disclosures to retail customers 

43 Pub. L. No. 111-203, § 913(b), 124 Stat. 1376, 1824-25 (2010) a retail customer is 

defined as a natural person, or the legal representative of a natural person, who receives 

personalized investment advice from a broker, dealer, or investment adviser and uses the 

advice primarily for personal, family, or household purposes. 
 

Page 17 GAO-13-30 401(k) Plans

about the terms of their relationships with broker-dealers and investment 

advisers.44 (For more information on securities laws, see GAO-11-119.)45

If SEC decides to impose a uniform fiduciary standard on investment 

advisers and broker-dealers when providing personalized investment 

advice to retail customers, this standard could differ from the fiduciary 

standard applicable to ERISA fiduciaries. While investment advisers must 

act in the best interests of their clients, ERISA fiduciaries are required to 

act in the sole interest of plan participants and beneficiaries for the 

exclusive purpose of providing benefits and defraying administrative 

costs. Additionally, although ERISA prohibits certain transactions, such 

as sales of securities to plans by fiduciaries, the Advisers Act permits 

investment advisers to engage in these sales as long as disclosures are 

made and consent is obtained. 

401(k) plan processes for handling separating participants’ accounts 

create barriers for participants to roll their savings to a new plan, making 

IRA rollovers an easier and faster choice for those who want to 

consolidate their savings in a new account after they separate from an 

employer. Currently, plans may include waiting periods before processing 

a new employee’s rollover and have long and complex processes for 

verifying the tax-qualified status of the savings to be rolled over. Barriers 

to rolling 401(k) plan savings to a new plan include:

• Rollover waiting period. When joining a 401(k) plan with a new 

employer, several service providers told us that participants may find 

the new plan requires a waiting period prior to rolling in old 401(k) 

plan balances. These waiting periods are at the discretion of the plan 

and can last weeks or months. Treasury and IRS officials said that 

while plans see the delays as an administrative necessity, the delays 

create uncertainty for participants and complicate the rollover process. 

In contrast, several service provider representatives pointed out to our 

 

44 SEC, Study on Investment Advisers and Broker-Dealers (Washington, D.C.: January, 

2011). In response to SEC’s request for comments to inform its study, FINRA noted that 

there is no broker-dealer equivalent to the up-front general disclosure of an investment 

adviser’s business activities and relationships that may cause conflicts of interest with 

retail customers. Letter from Marc Menchel, Executive Vice President and General 

Counsel, FINRA, to Elizabeth M. Murphy, Secretary, SEC, August 25, 2010. 

45 GAO, 401(k) Plans: Improved Regulation Could Better Protect Participants from 

Conflicts of Interest, GAO-11-119 (Washington, D.C.: Jan. 28, 2011).

Direct Rollover 

Process Can Be 

Inefficient and 

Encourages 

Participants to 

Choose the IRA 

Option 
 

Page 18 GAO-13-30 401(k) Plans

investigator that their companies’ IRAs require no such waiting period 

when rolling over funds. Consistent with the IRC and ERISA, IRS and 

Labor have largely left plan sponsors free to follow their own practices 

about when and how they will allow rollovers into their plans.

• Complex verification process. Plans can require complex and 

lengthy verification processes for rollover funds to ensure they are 

tax-qualified. For example, they can request a participant’s previous 

plan complete verification forms, but that plan has little incentive to 

handle the verification in a timely way. Participants may be 

responsible for ensuring that their former employers’ plans complete 

and return the verification forms. The IRS publishes requirements that 

plans must meet to maintain their qualified status. This status benefits 

both participants and the plan sponsors. One requirement is that 

plans hold only tax-qualified money. Treasury and IRS officials told us 

that plan sponsors discouraging rollovers from old plans is a problem, 

which may result from their concerns that accepting rollover funds 

from other plans will result in inadvertently taking in non-qualified 

money into their 401(k) plans, which could violate IRS rules and result 

in loss of a plan’s qualified status. But Treasury and IRS officials said 

that plan sponsors who are acting reasonably should not be fearful

about accepting non-qualified money into their plans, because if such 

errors are identified, typically they can be corrected without penalty. 

IRS regulations provide that as long as a plan that receives rollover 

funds “reasonably concludes” that they came from a qualified plan, 

and as long as the funds are removed from the plan, the receiving 

plan’s qualified status would not be at risk even if it is later concluded 

that the funds came from a plan that was not qualified.46

One plan sponsor told us that only 10 to 15 percent of participants who 

separate from the plan move their savings to a new employer’s plan 

because of barriers in the process, including many paper forms and the 

involvement of both plan administrators. Furthermore, experts we 

interviewed said that these barriers in the process make plan-to-plan 

rollovers more difficult for participants. That difficulty may discourage 

participants from keeping their savings in the plan environment, which 

generally has lower fees, better comparative information, and ERISA plan 

fiduciaries required to select and monitor reasonable investment options.

 

46 26 C.F.R. § 1.401(a)(31)-1, Q/A-14 (2012). 
 

Page 19 GAO-13-30 401(k) Plans

A lack of a standardized process also adds to the complexity of the 

rollover process, which burdens participants and gives an advantage to 

IRA providers who have the resources and financial incentive to provide 

more rollover assistance than plan sponsors. Even participants with past 

rollover experience may have no idea what information their current 

plans’ distribution forms will require, how long the previous employers’ 

plans will take to process a distribution request, or how the receiving 

plans will process a direct rollover request. More than half of service 

providers we interviewed who had suggestions for improving the rollover 

process (19 of 35 with suggestions) said regulators could improve the 

rollover process by simplifying it. One plan adviser told us that half of 

participants need help filling out the distribution paperwork.

• Paperwork differences. Several service providers told us that plans 

use different distribution forms, which may confuse participants. Labor 

does not require 401(k) plans to use standardized distribution 

paperwork. Some service providers suggested that using 

standardized distribution forms or electronic forms to process the 

rollover request would be one way to simplify the process. We 

reviewed 14 packets of sample distribution materials provided to plan 

participants and found that the size and content of the packets varied. 

Several were single documents of only a few pages, while others 

included multiple documents, with three exceeding 15 pages in total. 

More than half of the packets did not include a distribution request 

form, burdening the participants by forcing them to contact their plans 

or service providers to request the necessary forms.

• Processing time differences. The length of time it takes to complete 

a distribution of a participant’s 401(k) plan balance largely depends on 

the service provider for the plan. Neither IRS nor Labor requires 

401(k) plans to process distribution requests in a specified time frame. 

Several service providers told us that because it is not in the interests 

of most service providers to release funds to another service provider 

they may not process such requests expeditiously. One service 

provider filed a complaint with FINRA to pressure another service 

provider to release 401(k) plan funds for a rollover. An individual 

participant is unlikely to know how to apply the same pressure when 

faced with inexplicable delays. Unless required to process a 

distribution within a specified time frame, plans and their service 

providers will continue to make this task a low priority, leaving 

participants uncertain about the status of their retirement savings.

In addition, industry experts said that the direct-rollover process is often 

inefficient, taking more time and effort than is necessary, whether the 
 

Page 20 GAO-13-30 401(k) Plans

participant is rolling over to another plan or rolling into an IRA. As shown 

in figure 2, during a direct rollover, when separating participants request 

that their current plan transfer their plan savings to a specific new plan or 

IRA, many plans and service providers route the distribution check (which 

is made payable only to the receiving entity) through the participant who 

must then forward it to their new plan or IRA. Experts noted that the 

inefficiency of processing direct rollovers this way burdens participants 

choosing to roll over their plan savings. This process can result in their 

checks getting misplaced or lost, which is more likely if someone is 

relocating for a new job. Direct rollovers processed this way rely on 

individuals to play a crucial role in routing their retirement plan savings to 

a receiving entity, which, if they make a mistake, results in confusion for 

the individual who thinks their money is invested when it is not or who 

may not know where their plan savings are located. In addition, this 

practice prolongs the length of time it takes to process the rollover. A 

participant’s money may be in process for weeks given the time it takes a 

service provider to prepare and send a check and forward it by mail, first 

to a participant and then on to a receiving plan or IRA. Such processing 

delays increase the likelihood that a participant will not complete the 

rollover process, leaving his or her retirement accounts unconsolidated 

and harder to manage.

Figure 2: Two Ways 401(k) Plans May Process Direct Rollovers to a New Plan

Note: The same processes are used for 401(k) plan rollovers to IRAs. Not every institution may 

accept rollovers electronically.
 

Page 21 GAO-13-30 401(k) Plans

Treasury and IRS officials said that 401(k) plan service providers often 

choose to send direct-rollover distribution checks to participants rather 

than to the receiving institutions, because it is easier for the service 

provider. Although IRS requires plans that receive a direct-rollover 

request to issue non-transferable checks payable to the receiving plan or 

IRA, regulations expressly allow the distributing plans to send the check 

itself to the separating participants, making participants responsible for 

completing the rollover and shifting the administrative burden from the 

record-keepers,47 who are well-suited to manage the task, to individuals 

who may not know what steps to take.48

Although rolling directly into an IRA can also require participants to act as 

intermediaries by receiving and relaying their checks, IRA providers offer 

participants assistance with the rollover process, making it as easy as 

possible. A third (10 of 30) of the 401(k) plan service providers called by 

our investigator seeking information about options for his 401(k) plan 

savings at his ex-employer’s plan offered to assist the caller with an IRA 

rollover, but just one of those offered to assist with a plan-to-plan rollover. 

Some firms’ representatives provided their direct phone numbers for the 

caller to use if he had questions or when he was ready to roll over to an 

IRA and others highlighted the complexity of the rollover process, offering 

to help with the paperwork. For example, one firm filled out portions of the 

rollover paperwork for the caller and e-mailed it to him, noting places 

where he would need to add information or sign. According to one 

industry survey of participants with savings at a former employer’s plan, 

online research is a key source of information for those researching their 

rollover options, providing another venue for IRA providers to promote the 

relative ease of an IRA rollover and the assistance they provide with 

processing a rollover.49

We found that it is common for IRA providers to offer assistance with a 

rollover to their IRA. Our review of 10 IRA providers’ websites found that 

9 providers advertise their assistance with processing an IRA rollover. 

Several providers advertise that someone could roll over to their IRA in 15 

 

47 Recordkeeping services, including processing transactions such as rollovers, are 

among the many services offered by 401(k) plan service providers. 

48 26 C.F.R. § 1.401(a)(31), Q/A-4 (2012). 

49 Cogent Research, Investor Assets in Motion TM 2012: IRA and Retirement Marketplace 

Opportunities (December 2011).
 

Page 22 GAO-13-30 401(k) Plans

minutes or less. For example, one provider contacted by our investigator 

claimed that an individual can complete the online IRA rollover application 

in 10 minutes. Cash bonuses for an individual rolling over funds are 

another incentive to roll over to a particular IRA provider. In our analysis 

of providers’ websites we found bonuses that ranged from $50 to $2,500, 

depending on the individual’s amount of savings. According to a large but 

non-generalizable survey of individuals eligible to rollover, of those 

surveyed who had rolled over savings to an IRA, 68 percent rated “quick 

and easy process to open the account” as important to their decisions 

and 52 percent gave “assistance in completing the forms to open the 

account” the same high rating.50 Another study found that the most 

popular reason participants gave for selecting an IRA provider was that it 

made rolling over easy.51 Additionally, a service provider that assists plan 

participants in rolling over their savings told us that, when plans or their 

service providers provide such assistance, a large proportion of 

participants chose to consolidate their old accounts in the new 401(k) 

plan.

Many experts told us that much of the information and assistance 

participants receive is through the marketing efforts of service providers 

touting the benefits of IRA rollovers and is not always objective. Plan 

participants are often subject to biased information and aggressive 

marketing of IRAs when seeking assistance and information regarding 

what to do with their 401(k) plan savings when they separate or have 

separated from employment with a plan sponsor. In many cases, such 

information and marketing come from plan service providers. As we have 

reported in the past, the opportunity for service providers to sell 

participants their own retail investment products and services, such as

IRAs, may create an incentive for service providers to steer participants 

toward the purchase of such products and services even when they may 

not serve the participants’ best interests.52

 

50 Spectrem Group, IRA Rollover Market 2011. Those data were not generalizable, 

according to GAO standards for statistical reliability, and statements made describing 

those data reflect only the experience of the 940 individuals who responded to Spectrem’s 

survey.

51 Cogent Research, Investor Assets in Motion TM 2012: IRA and Retirement Marketplace 

Opportunities. (December 2011). 

52 See GAO-11-119. 

Participants Are 

Subjected to 

Pervasive Marketing 

of IRAs, but May

Receive Limited 

Assistance Regarding 

Their Distribution 

Options 
 

Page 23 GAO-13-30 401(k) Plans

With respect to asset allocation of current plan investment options, 

according to EBSA’s 1996 interpretive bulletin on investment advice and 

investment education, service providers may present specific investment 

alternatives under 401(k) plans— including those in which the provider 

has a financial interest—as examples of investments available under an 

asset class when presenting asset allocation models as part of 

investment education.53 The bulletin specifies that a model identifying a 

specific investment alternative available under the plan would not 

constitute a “recommendation” if accompanied by statements indicating 

that (1) the plan may offer investment alternatives with similar risk and 

return and where to find information on those investments, and (2) 

participants or beneficiaries, in applying particular asset allocation models 

to their individual situations, should consider their other assets, income, 

and investments in addition to their interests in the plan.54 Accordingly, 

presenting specific investment options would not constitute provision of 

“investment advice,” and therefore would not trigger ERISA fiduciary 

status, which would require the service provider to act solely in the best 

interest of the plan participants.55

Even with disclosure statements as required in the bulletin, participants 

may interpret information about their plans providers’ retail investment 

products contained in their plans’ educational materials as suggestions or 

In the bulletin, EBSA contends that 

such statements would enable a participant or beneficiary to assess the 

relevance of an asset allocation model to his or her individual situation.

 

53 29 C.F.R. § 2509.96-1(d)(3) (2012). Asset allocation models include information and 

materials that provide an investor with models of asset allocation portfolios of hypothetical 

individuals with different time horizons and risk profiles. Such models are based on 

generally accepted investment theories that take into account the historical returns of 

different asset classes (e.g., equities, bonds, or cash) over defined periods of time. (For 

more information see GAO-11-119.) An asset allocation model could be valuable for 

investors by identifying how they can reduce investment risk by further diversifying their 

investments, which means reallocating money across a range of stocks, bonds, or cash 

investments. 

54 29 C.F.R. § 2509.96-1(d)(3)(iii) and (iv) (2012). By not making a recommendation, a 

provider presumably avoids crossing the line into investment advice, which would trigger 

ERISA fiduciary standards.

55 29 C.F.R. § 2510.3-21(c)(1)(i) (2012). 
 

Page 24 GAO-13-30 401(k) Plans

recommendations to choose those products.56 Research has shown that 

many individuals contributing to defined contribution plans or IRAs spend 

very little time scrutinizing disclosure statements.57 Furthermore, as we 

have previously reported, consumers may not understand the differences 

among various types of financial services professionals (including the 

different standards of care they must adhere to), or that those 

professionals may have conflicts of interest when providing guidance or 

selling products.58

Figure 3: One Example of a 401(k) Plan Service Provider Using Distribution Information as a Venue to Promote Their Own 

Retail IRA Product

Because of a lack of understanding of the distinction 

between investment education and investment advice or of the standards 

plan providers must adhere to when giving information or assistance, 

participants may believe that providers are giving them investment advice 

and that it is being provided in their best interest. As shown in figure 3, a 

provider’s offer of their own retail IRA in a plan’s distribution materials is 

one way to guide participants into their products.

One plan provider told us that the marketing of IRA rollover products by 

service providers can be pervasive throughout plan documents, and even 

the summary plan descriptions might steer participants into a provider’s 

 

56 See GAO-11-119. Also, as mentioned previously, numerous studies have found that 

many Americans lack basic financial literacy, including an understanding of fundamental 

investment concepts , such as the benefits of compounding interest, risk diversification, 

and inflation, that are necessary for making well-informed decisions and evaluating 

recommendations. 

57 LIMRA, http://www.limra.com/newscenter/newsarchive/archivedetails.aspx?prid=259. 

58 See GAO-11-119 and GAO-11-235. 
 

Page 25 GAO-13-30 401(k) Plans

retail products. Although many service providers said they do not promote 

their own investment products in interactions with plan participants of the 

plans they serve, we reviewed examples of educational materials that 

couple distribution information with information on the providers’ retail IRA 

products. We also found several separation packets that emphasized the 

simplicity of rolling over to the service providers’ IRAs, as opposed to the 

relative complexity of other providers’ IRAs, and added flexibility 

regarding distributions and beneficiaries. Additionally, many of the 

providers that provided written responses to our questions indicated that 

the educational materials they give to participants include their firms’ IRA 

products as examples. While some plan sponsors may attempt to limit 

such marketing activities, other sponsors are either unaware that they can 

negotiate a provider’s ability to promote its products to plan participants or 

they do not have the resources to prepare their own materials in lieu of 

the materials offered by their providers.59

The marketing of IRA products by providers is not limited to written 

materials but may also be pervasive in other interactions with participants. 

Participants can be steered toward IRA rollovers when receiving 

information from service providers, including via call centers. We were 

told by industry experts that

• participants think that they have received investment advice from their 

service providers that is solely in the participants’ best interest, even 

though they may not actually be receiving such advice;

• service providers use their websites and call centers, including 

making outbound calls to plan participants, as a means of marketing 

their firms’ retail IRA products and steering participants into them; and

• when taking a distribution participants may be steered first into a 

provider’s IRA product, and if they opt out or decline that rollover 

option, they are then directed to a portal sponsored by the same 

provider where participants can access other companies’ IRA 

platforms, for which the service provider receives some compensation 

if a participant chooses a company’s IRA through that portal.

In addition to marketing their products, service providers may offer their 

call center representatives financial or other incentives for asset retention, 

when separating plan participants leave their assets in the plan or roll 

 

59 We previously reported that many 401(k) plan sponsors were unaware of or did not fully 

understand both the fees charged to their plans and their participants as well as the fee 

arrangements used by plan service providers. See GAO-12-325. 
 

Page 26 GAO-13-30 401(k) Plans

over to one of the providers’ IRA products, which could lead to 

representatives promoting the providers’ products over other options. 

When our investigator called 30 401(k) plan service providers he found 

that, even though he identified himself as a potential participant in the

plans served by the providers, 11 service provider representatives 

encouraged him to roll his plan savings to an IRA instead of to the new 

plan without specific knowledge of his financial circumstances. In 

addition, about half (16 of 30) of the representatives brought up the fact 

that IRAs have more investment options than 401(k) plans. Finally, some 

of the call center representatives did not mention the option of leaving 

funds in the old plan, 12 of 30 representatives raised doubts about the 

caller’s ability to roll over to a new 401(k) plan, and several emphasized 

the rollover assistance they provide. See figure 4 below for excerpts from 

some of the conversations.
 

Page 27 GAO-13-30 401(k) Plans

Figure 4: Examples of 401(k) Plan Service Providers (Who May or May Not Be Fiduciaries) Giving a Potential Plan Participant 

Guidance Favoring IRAs

A short video of examples of 401(k) service providers giving a potential participant guidance 

favoring IRAs is available online at www.gao.gov/multimedia/video/GAO-13-30/1.

As a result of being allowed to market their IRAs and retail investment 

products in educational materials or in interactions with participants, 

providers are able to steer participants to their products without the 

participants clearly being aware that they are being marketed to instead 

of being advised about their options. 
 

Page 28 GAO-13-30 401(k) Plans

While some service providers appear to take full advantage of current 

regulations that allow them to market their retail IRA products and 

services, service providers often seek to avoid ERISA fiduciary status 

and, as a result, are careful not to provide assistance that could trigger 

fiduciary liability. Service providers told us that the regulatory 

environment, specifically the lack of clarity between investment education 

and investment advice, creates challenges for them in providing 

information to participants. Experts said that, to limit liability, some service 

providers are very cautious when interacting with plan participants and 

discussing distribution options for fear that the information they provide 

may be construed as investment advice, which would trigger ERISA 

fiduciary liability. One sponsor noted that the materials provided to 

participants are dense and contain a lot of “legalese” in order to observe 

the regulations that govern a sponsor’s interactions with participants. In 

addition, plans and service providers tend to provide participants with prepackaged materials that are generic in nature in part to avoid crossing the 

line from providing investment education to investment advice.

Absent adequate agency guidance about the application of the ERISA 

definition of fiduciary, including the types of information and assistance 

that constitute investment advice, which may trigger fiduciary liability, 

many plan sponsors and service providers are uncertain and concerned 

about what they can provide to plan participants. As a result, for fear of 

incurring added liability, plan sponsors and service providers may 

unnecessarily limit the education they provide to plan participants about 

their distribution options when separating from employment. 

Consequently, participants may continue to receive limited information 

and assistance about what to do with their 401(k) plan savings, while 

continuing to be susceptible to the ongoing and pervasive marketing of 

IRAs. By resolving its fiduciary definition initiative and requiring that 

service providers disclose their financial interests and the standards to 

which they are subject (ERISA fiduciary standards, SEC standards, or 

others), Labor can provide plan sponsors and service providers with a 

clearer understanding about the information they can provide to 

participants upon separation from employment and whether their 

assistance subjects them to ERISA fiduciary standards. Without such 

action, participants may remain unaware that the investment information 

they receive could be conflicted information, because they do not know 

that service providers may or may not (1) be subject to ERISA fiduciary 
 

Page 29 GAO-13-30 401(k) Plans

requirements or other standards when speaking to them,

60 and (2) have 

direct financial interests in the investment decisions participants may 

make.

401(k) plan participants separating from their employers may find it 

difficult to understand and compare their distribution options. Service 

providers and other experts we interviewed said that the number and 

complexity of factors that differ among the four main options make it 

difficult to understand the possible consequences of each, such as the 

differences in tax withholding. Participants may have difficulty finding 

information on IRA fees, and when they do find it, they may not 

understand it. Experts cite some key differences that individuals 

separating from an employer may want to consider when making a 

distribution decision, as shown in table 3. Determining what factors are 

most important for an individual must be done on a case-by-case basis, 

based on individual circumstances, capabilities, and needs.

 

60 Because the ERISA definition of fiduciary is functional in nature, a plan sponsor or 

service provider may have plan fiduciary status when performing some roles or functions 

but not others. Fiduciary status under ERISA does not depend on a person’s formal title or 

how a person identifies themselves. Parker v. Bain, 68 F. 3d 1131, 1139 (9th Cir. 1995).

Participants Face 

Challenges in Making 

Rollover Decisions

Comparing Distribution 

Options Is Complex

Complex Information May 

Make It Difficult for 

Participants to Understand and 

Compare Distribution Options
 

Page 30 GAO-13-30 401(k) Plans

Table 3: Some Key Differences between 401(k) Plans and IRAs to Consider When Making Distribution Decisions 

Key differences 401(k) Plan IRA

Investment selection and 

monitoring

Plan fiduciaries are responsible for selecting and 

monitoring investment options in the best interest 

of the participant. 

Individual is solely responsible for selecting and 

monitoring investments.

Investment choices Employer-selected investment options from which 

to choose.

Nearly unlimited investment options from which to 

choose. a

Acceptance of rollovers May or may not accept rollovers from previous 

employers’ 401(k) plans or other qualified 

accounts.

IRAs will generally accept rollovers from an 

employer plan or another IRA.

Fees Plans may offer low-fee mutual fund investments 

through institutional pricing.b IRA providers generally offer retail mutual funds 

and reserve less costly share classes for only 

those individuals with large balances.

Fee disclosure Subject to Labor regulations regarding disclosure 

of fee information intended to make it easier for 

participants to understand and compare fees.

Not subject to Labor regulations regarding 

disclosure of fee information, but SEC requires 

certain disclosures in individual mutual fund 

prospectuses and summary prospectuses.

Fee payment Many plans absorb the cost of administrative and 

other non-investment fees.b Investor generally pays administrative costs and 

fees.c

Access to funds before 

retirement

Plans may allow non-taxable pre-retirement loans 

for certain reasons or hardship distributions but 

generally restrict distributions prior to separation.

No pre-retirement loans but taxable distributions 

may be taken for any reason.

Tax liabilities Distributions taxed as income unless rolled over 

and, for other than direct rollovers, mandatory 

withholding of 20 percent of distributions for tax 

purposes.d 

Distributions taxed as income unless rolled over,e

but no mandatory withholding of 20 percent of 

distribution for tax purposes.d

Source: Summary from GAO interviews of experts and GAO research of expert opinions.

a IRA funds used to purchase insurance or collectibles, such as antiques and stamps, are treated as 

distributions. 26 U.S.C. § 408(e)(5) and (m).

b For information about 401(k) plan fees see GAO-12-325. 

c In addition to lowering or waiving fees for investors with large balances, IRA providers sometimes, 

as a rollover promotion, waive account maintenance fees.

d Additional tax of 10 percent may apply for distributions before age 591⁄2.

e Qualified distributions from Roth IRAs are not taxed.
 

Page 31 GAO-13-30 401(k) Plans

As we have previously reported, understanding these complex factors is 

especially difficult given that many participants have limited financial 

literacy skills.61 Studies have found that many individuals lack knowledge 

of even basic financial concepts.62 Yet, as financial markets have become 

more complex, the proliferation of new investment products has made 

obtaining clear information and understanding financial concepts 

increasingly necessary for participants to make sound retirement 

investment decisions. Experts have noted that investors should consider 

a number of factors, including their time horizon for retirement, risk 

tolerance, and the value and asset allocation of other retirement savings 

when making investment decisions.63 One industry-based survey found 

that 52 percent of the participants surveyed (which included, but was not 

limited to 401(k) plan participants) said they lacked sophistication about 

financial matters. The study also found that about half of “relatively 

engaged” investors felt confident that they knew how to select a diverse 

mix of investments and 40 percent said that they knew how much they 

should save for retirement. In contrast, less than 20 percent of “lessengaged” investors said they thought they could do these things.64

In addition, it can be difficult for individuals to get accurate information 

when trying to identify and understand these factors. For example, in 

response to a call from our investigator, a representative at a service 

provider’s call center said that IRAs differ from 401(k) plans because an 

IRA “has no taxes”. The representative did not explain what taxes he was 

Other 

research indicates that many plan participants know little about the fees 

that they already pay in their 401(k) plans, making it unlikely that they 

could compare plan fees to those of another plan or an IRA. The lack of 

financial education and ability to make sound financial choices may leave 

participants unequipped to understand and weigh the factors key to 

making the best decision regarding their 401(k) plan savings. 

 

61 GAO-11-119; GAO, Financial Literacy: Enhancing the Effectiveness of the Federal 

Government’s Role, GAO-12-636T (Washington, D.C.: Apr. 26, 2012), and Retirement 

Savings: Better Information and Sponsor Guidance Could Improve Oversight and Reduce 

Fees for Participants, GAO-09-641 (Washington, D.C.: Sept. 4, 2009).

62 For example, FINRA Investor Education Foundation, Financial Capability in the United 

States (December 2009). 

63 GAO, Financial Literacy: Enhancing the Effectiveness of the Federal Government’s 

Role, GAO-12-636T (Washington, D.C.: Apr. 26, 2012). 

64 State Street Global Advisors, Biannual DC Investor Survey (July 2012). 
 

Page 32 GAO-13-30 401(k) Plans

referring to in his comment. Though IRA cash outs do not require up-front 

tax withholding the way 401(k) plan cash outs do, ultimately most IRA65

As shown in figure 5, an individual choosing to roll over their plan 

distribution into an IRA must first make several complex investment 

choices. These include allocating money across asset classes and 

choosing investments from among thousands of mutual funds and other 

options that offer the right balance of risk, return, and fees—which may 

be confusing to some investors. Moreover, the myriad investment options 

in an IRA make the process of comparing them more difficult than in a 

401(k) plan, which may have a limited menu of investment options. For 

example, some service providers who offer IRAs promote their access to 

a “self-directed brokerage window,” which allows an investor to choose 

from an even larger number of potential investment options and to buy 

and sell individual stocks and even gold without the direct assistance of a 

broker,

and 401(k) plan distributions will be taxed the same way at the end of the 

year. Given many individuals’ lack of basic financial literacy, such a 

statement could be misunderstood by some to mean that savings in a 

401(k) plan are taxed but savings in an IRA are not. In fact, both IRAs 

and 401(k) plans offer a place to accumulate retirement savings tax-free 

until distribution.

66

 

65 For Roth IRAs, distributions made after age 591⁄2 are not subject to income tax. For 

traditional IRAs funded with non-deductible contributions, the portion of distributions 

attributable to contributions is not taxed but the portion of distributions attributable to 

earnings is taxed. 

but this option can be associated with high fees compared to 

other mutual fund alternatives.

66 About 20 percent of 401(k) plans also offer access to a self-directed brokerage window.

At the end of the 1st quarter in 2011, 36 percent of IRA assets were in brokerage 

accounts, which amounts to $1.7 trillion in retirement assets.

Rollovers to IRAs Require 

Complex Choices, and Fees are 

Difficult to Identify
 

Page 33 GAO-13-30 401(k) Plans

Figure 5: IRA Rollover Decisions Involve Several Complex Investment Choices

As shown in figure 6, prudent decision making regarding IRAs and the 

rollover process generally may require review and comprehension of a 

fair amount of documentation. For example, once participants have 

chosen to go with a particular IRA provider, the IRA application refers 

them to read multiple documents, including investment prospectuses, 

which they should review if they are interested in re-investing their 

retirement plan savings in an investment other than a money market 

account, the typical default investment for IRA rollovers. In addition, to 

prudently compare the many funds offered before making investment 

choices, an investor must then obtain and analyze additional 

prospectuses.
 

Page 34 GAO-13-30 401(k) Plans

Figure 6: Number of Pages in One IRA Rollover Application and Associated Investment Research

Note: Mutual funds X and Y are examples based on the prospectus for one of the most popular target 

date funds. Actual number of pages could differ depending on specific funds reviewed.

IRA fee information is especially difficult to find and, if it is located, to 

understand. Our review of websites of 10 large IRA providers showed that 

IRA fee information was generally scattered across the providers’ 

websites in multiple documents, making it difficult to identify all applicable 

fees.67

 

67 401(k) plans are required, for example, to disclose information about administrative 

feels or expenses that may be charged against a participant’s individual account. 29 

C.F.R. § 2550.404a-5(c)(3) (2012). In addition, investment-related information must be 

provided in a format designed to facilitate comparison. 29 C.F.R. § 2550.404a-5(d)(2) 

(2012). 

For example, in one rollover application, the schedule of fees, 

where an IRA provider typically lists investment fees, was located in the 

last section of a 49-page supplement. This section covered the fee 

information over four and a half pages using 8-point typeface (this size). In 
 

Page 35 GAO-13-30 401(k) Plans

fact, fees are often located in footnotes with small typeface in the 

documents given to IRA investors. As shown in figure 7, even the word 

“fee” can be hard to find for IRA rollover customers and investors.

Figure 7: The Most Frequently Used Words in One IRA Rollover Application and Target Date Fund Prospectus

Note: A “word cloud” shows the words used most in the document. The more often a word appeared, 

the larger it is shown. See appendix I for more information about how this figure was created.

Once an individual obtains IRA fee information, it can be difficult to 

understand. Labor’s recent fee disclosure regulations68 require 401(k) 

plans to disclose plan fees with greater clarity than IRA providers, which

have no such requirement, are likely to provide investors.69

 

68 75 Fed. Reg. 64,910, 69,937-46 (Oct. 20, 2010) (codified at 29 C.F.R. §§ 2550.404a-5 

and 2550.404c-1 (2012)).

For instance, 

plan disclosures generally list the different 401(k) plan investment options’ 

costs side by side to facilitate comparison, whereas IRA disclosures will 

69 We have reported that many 401(k) plan participants incorrectly believed their plans 

were free, but Labor’s 2010 401(k) fee disclosure rules are intended to correct that 

misperception. See GAO-12-325 and GAO, Private Pensions: Changes Needed to 

Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees, 

GAO-07-21 (Washington, D.C.: Nov. 16, 2006).
 

Page 36 GAO-13-30 401(k) Plans

typically not have fee data with comparable clarity and presentation.70

Complex fee structures also make IRA fee information difficult to 

understand. Specifically, the number and variety of IRA investments 

introduce different types of fees that may be unfamiliar to participants and 

are not easy to understand. For example, brokerage fees for an IRA 

investor vary depending on many factors, including investor choices 

about how often to buy or sell an asset; whether to make transactions 

over the phone, internet, or with assistance from a representative; buying 

domestic or foreign stock; and how long to hold an asset. In addition, 

industry research shows that many investors want advice and help 

investing their retirement savings, which are services that can further add 

to the cost of investing in an IRA. For example, investment management 

or investment advisory fees are typically a percentage of assets under 

management. At one of the largest IRA providers, the annual advisory fee 

is 1.5 percent of assets for balances up to $500,000, with rates 

decreasing for larger accounts.

One plan provider told us that it would help investors understand the 

differences between their 401(k) plans and IRAs if IRA providers were 

required to provide the same level of fee disclosure.

Finally, misleading statements also make it difficult to understand IRA 

fees. Calls made by our investigator to 401(k) plan service providers, 

most of which offer IRA products, found that 7 of 30 call center 

representatives (representing firms administering at least 34 percent of 

IRA assets at the end of the 1st quarter in 2011) said that their IRAs were 

“free” or had no fees with a minimum balance, without clearly explaining 

that investment, transaction, and other fees could still apply, depending 

on investment decisions.

71

 

70 Some industry website tools allow retail investors to compare mutual funds in a similar 

way, once they choose which funds to compare.

In our review of 10 IRA websites, we found 5 

providers that made similar claims, often with certain conditions such as a 

$50,000 minimum balance or consent to receive electronic statements 

71 Information obtained from our investigator’s calls to 30 401(k) service providers, 27 of 

which also offer IRAs, provides illustrative examples of the type of information callers 

might receive when inquiring about rolling funds into an IRA or a 401(k) plan, but they may 

not be representative of the general service provider population. See appendix I for further 

details regarding our methodology.
 

Page 37 GAO-13-30 401(k) Plans

explained separately in footnotes.72

Participants thinking of rolling their plan savings to a plan offered by a 

new employer have to first compare the terms and investment 

opportunities laid out by the new plan sponsor to see if that plan offers 

better terms, given their investment goals, than either the old plan, if 

remaining in the plan is an option, or an IRA. Currently, plan sponsors 

have considerable flexibility with respect to plan design, including 

participant requirements, distribution options, and access to loans.

For example, an IRA provider’s 

website we reviewed stated that the provider would waive annual 

custodial fees if the balance exceeded an unspecified amount and only 

referred vaguely to other fees that might still apply, which were disclosed 

in multiple separate documents available upon request. Accurate 

information on when IRA providers will waive fees and what fees they will 

waive can be difficult for participants both to locate and understand.

73

Service providers told us that they want to retain assets of participants 

separating from plans they serve. As a result, they may encourage 

participants to roll over distributions into their IRA products and never 

mention or even discourage plan participants from rolling their 

In 

reviewing the new plan, participants may find that it does not accept 

rollover balances from other 401(k) plans. Our investigator’s calls to 30 

401(k) plan service providers found that several call center 

representatives also warned that the caller’s potential new 401(k) plan, 

serviced by their firm, might restrict or prohibit rollovers from other 401(k) 

plans. Even when plans accept rollovers from other plans, industry 

experts we interviewed told us that plan sponsors do not have strong 

incentives to accept the assets of new participants and may not promote 

the option. As a result, given the effort participants must make to 

understand new plans’ rules and the lack of encouragement from plan 

sponsors and others to roll over balances into new plans, participants 

may remain unaware of their ability to roll over into new plans or may be 

unmotivated to exercise that option.

 

72 In multiple websites we reviewed, disclosure of other fees was located in small type font 

in footnotes on the webpage. 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.

73 Plans provide these rules to new participants in a summary plan description. 29 U.S.C. 

§ 1022.

Rollovers to New 401(k) Plans 

May Prove Difficult without 

Complete Information
 

Page 38 GAO-13-30 401(k) Plans

distributions into new plans with different service providers. Marketing and 

research firms also cite active contact as one strategy providers should 

employ to retain assets. Experts specifically cited the practice of making 

outbound calls to participants as part of asset retention strategies and 

also noted that providers often only target participants with larger 

balances. Consequently, participants are likely to receive targeted 

information about rolling over into an IRA but may receive little 

information about rollover options outside of their current providers’ IRAs. 

Service providers also told us that they seek to capture assets moving out 

of plans serviced by other providers. 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 exemployer’s plan to the service provider’s IRA products, and 12 did not 

mention the option to leave money in the current plan. However, of the 18 

who did mention the option to stay in the plan, 5 did so only after being 

asked about it by the caller.

Currently, plans may treat participants who are employees and those no 

longer employed by the plan sponsor differently. Surveys of plan 

sponsors and asset managers for plans suggest that roughly 60 percent 

of plans are ambivalent about or even averse to keeping participants 

savings in the plan after they separate from employment.74 Service 

providers and experts corroborated these findings, telling us that some 

plan sponsors do not want to retain separated employees’ savings in their 

plans for a variety of reasons, such as reducing administrative burdens, 

costs, and legal liability.75 These attitudes are evident in some plans’ 

practice of treating active and separated participants differently,

76

 

74 Callan Associates, 2011 Defined Contribution Trends Survey; and FRC, a Division of 

Strategic Insight, The Rollover Decision: Successful Strategies for Retaining Retirement 

Assets. Another survey of plan sponsors found that 26 percent of respondents preferred 

separated participants leave the plan and another 41 percent had no preference. Aon 

Hewitt, Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are 

Eroding Retirement Income (2011). 

making 

75 The IRC prohibits plan sponsors from distributing accounts valued at greater than 

$5,000 without the separated participants’ consent. 26 U.S.C. § 411(a)(11)(A).

76 IRS rules limit a plan’s ability to treat separated participants differently by providing that 

consent to a distribution is not valid if, under the plan, “significant detriment” would have 

been imposed on a participant, had the participant not consented to the distribution. 26 

C.F.R. § 1.411(a)-11(2) (2012).

Plans May Encourage 

Separating Participants Not to 

Keep Savings in the Plan 
 

Page 39 GAO-13-30 401(k) Plans

a former employer’s plan a less favorable place for the separated 

participant to leave their account balance. For example, some plans:

• Charge higher or additional fees to separated participants. One 

service provider we interviewed said that plan sponsors commonly 

charge an added administrative fee to the accounts of separated 

participants, making the plan more expensive than other options, like 

rolling over the account balance to a new plan or an IRA.77

• Restrict the separated participants’ ability to manage their savings in 

the plan, including their ability to take a loan.

• Discourage separated participants, perhaps inadvertently, from 

leaving their savings in plans by limiting their distribution options. For 

example, it is not uncommon for plans to limit distributions to the total 

balance rather than allowing partial distributions, which encourages 

some participants to move all their money out of a plan, providing a 

disincentive for someone with a sizeable balance or nearing the age 

for required minimum distribution to leave their savings in their plan.78

Although information about the tax consequences of taking a distribution 

from a 401(k) plan is one area where disclosure is required for plan 

participants, industry experts told us that the information often comes too 

late to inform the decision and is too complex for most people to 

understand. Participants separating from an employer may not 

understand the tax consequences of receiving a cash out from their 

401(k) plan, which can be especially confusing if the distribution is rolled 

over into a qualified employer plan or IRA within 60 days; such a 

 

77 Plan sponsors may discourage separating participants from leaving money in the plan 

for several reasons. For example, they may wish to avoid bearing a fiduciary duty to 

someone who is no longer an employee. In addition, there may be extra costs to the plan 

of providing all the required disclosures to an additional participant, such as hiring a 

service provider to develop the materials as well as to print and mail them to participants. 

Also, in some cases, retaining separated participants and their savings causes the 

number of participants or amount of assets in the plan to exceed the threshold requiring a 

Form 5500 disclosure, a detailed disclosure that plans with 100 or more participants must 

submit annually to Labor. 29 U.S.C. § 1024(a)(1) and (2) and 29 C.F.R. § 2520.104-41 

(2012). Meeting that requirement also adds to a plan’s costs. 

78 Required Minimum Distributions are amounts that a retirement plan generally must 

distribute to an account owner annually starting with the year that he or she reaches 701⁄2 

years of age or, if later, the year in which he or she retires. 26 U.S.C. § 401(a)(9)(A) and 

(C). If the retirement plan account is an IRA, the required minimum distribution must begin 

as soon as the account holder is 701⁄2 regardless of whether he or she is retired. 26 U.S.C. 

§ 401(a)(9)(C)(i)(II).

Indirect Rollovers from 401(k) 

Plans Have Tax Consequences 
 

Page 40 GAO-13-30 401(k) Plans

transaction is deemed an indirect rollover.79

 

79 The IRC requires that participants with an eligible rollover distribution have the option to 

roll their distributions into an IRA or another employer’s tax-qualified plan in the form of a 

direct rollover. 26 U.S.C. § 401(a)(31)(A).

In 2010, IRS revised its 

standard notice regarding tax information that plans are required to 

provide participants. Three service providers and one service provider 

trade association told us that notice helps to educate participants about 

their distribution options. However, many experts we spoke to still believe 

that participants may find it difficult to understand that certain types of 

distributions have different tax consequences, because the tax information 

they get from their plans is complex. For example, one plan provider told 

us that many participants do not understand the difference between direct 

and indirect rollovers. A misunderstanding of these options could prove 

costly for a participant, however, given the different tax treatment of the 

two methods of rolling over plan savings. Money transferred through a 

direct rollover—that is, made payable from one 401(k) plan directly to 

another qualified employer plan or an IRA—is not considered income and, 

therefore, does not have tax consequences. However, an indirect rollover 

from a plan (when a distribution is made by a check payable to the 

participant, who then rolls the money into another eligible plan or IRA 

within 60 days) requires mandatory withholding for tax purposes. 

Specifically, when a participant receives a cash out, the 401(k) plan must 

withhold 20 percent of the distribution for tax purposes. If the individual 

rolls the remaining 80 percent into a tax-qualified account within the 60-

day grace period (an indirect rollover) the individual will have to add funds 

from other sources to replace the 20 percent withheld or that withholding 

will count as income subject to income tax. (See the side bar for an 

example of the tax consequences of an indirect rollover from a 401(k) 

plan.) In contrast, indirect rollovers or cash outs of savings from IRAs, 

though also subject to any applicable taxes at year end, are not subject to 

mandatory withholding at the time of distribution. Finally, distributions from 

either 401(k) plans or IRAs taken before an individual reaches age 591⁄2 
 

Page 41 GAO-13-30 401(k) Plans

are subject to an additional 10 percent tax, though specific requirements 

differ for 401(k) plans and IRAs.80

Currently, federal regulations do not ensure that plans provide complete 

and timely information on distribution options to plan participants when 

they separate from employment. IRS requires plans to provide 

participants:

1. information that describes the tax consequences of the different 

distribution options (often referred to as the “402(f) special tax 

notice”),81

2. information about a participant’s right to defer receipt of distribution.

and

82

The 402(f) special tax notice addresses the tax consequences of 

distributions as well as some general information about rollovers. 

However, it does not provide a full discussion of all the options that may 

be available to separating participants or touch on other important factors 

participants should consider in making a distribution decision. For 

instance, as shown in appendix II, Treasury’s model 402(f) special tax 

notice does not include any discussion of leaving funds in a plan.

 

80 26 U.S.C. § 72(t). The additional 10 percent tax will not apply to the early distributions 

from a 401(k) plan if any of various conditions are met. For example, if the distribution is 

made to a beneficiary (or to the estate of the participant) on or after the death of the 

participant. (For more information see 

www.irs.gov/retirement/participant/article/0,,id=151787,00.html.) One of nine 

circumstances that exempts an IRA distribution from the 10 percent tax and that differs 

from the treatment of 401(k) plans, is if the distribution is a “qualified first-time homebuyer 

distribution.” 26 U.S.C. § 72(t)(2)(F). (For more information see 

www.irs.gov/taxtopics/tc557.html.) 

81 26 U.S.C. § 402(f)(1). The “402(f) special tax notice” explains the tax implications of the 

different distribution options, including explanation of the rollover rules, the special tax 

treatment for cash-outs (also called lump-sum distributions), and the mandatory 

withholding of 20 percent of distributions (including those that result in an indirect rollover).

IRS regulations generally require plan sponsors to provide the “section 402(f) notice” to 

participants no less than 30 and no more than 90 days before the date of distribution. 26 

C.F.R. § 1.402(f)-1, Q/A-2, Q/A-5) (2012). The Pension Protection Act of 2006 directed 

that these IRS regulations be modified to substitute 180 days for 90 days but no such 

regulation has been finalized. Pub. L. No. 109-280, § 1102(a)(1)(B), 120 Stat. 780, 1056.

82 26 C.F.R. §1.411(a)-11(c) (2012). IRS regulations generally require plan sponsors to 

also provide this information to participants no less than 30 and no more than 90 days 

before the date of distribution. The Pension Protection Act of 2006 directed that these IRS 

regulations be modified to substitute 180 days for 90 days but no such regulation has 

been finalized. Pub. L. No. 109-280, § 1102(a)(1)(B), 120 Stat. 780, 1056.

Information Participants 

Receive May Not Clearly 

Explain Distribution 

Options or Be Provided in 

a Timely Manner
 

Page 42 GAO-13-30 401(k) Plans

The IRS published a proposed rule in 2008 to expand on the information 

requirements for the second of the two required notices.83

“some currently available investment options in the plan may not be generally available on 

similar terms outside the plan and contact information for obtaining additional information 

on the general availability outside the plan of currently available investment options in the 

plan.” 

Specifically, 

under the proposed regulation plans would be required to include in the 

information provided, among other things, statements that:

and

“fees and expenses (including administrative or investment-related fees) outside the plan 

may be different from fees and expenses that apply to the participant’s account and 

contact information for obtaining information on such fees.” 

However, there was no requirement that plans explicitly disclose that 

IRAs may have higher fees than investments in a plan. Given recent 

research showing participants’ lack of knowledge about their plans’ fees,

participants may also not understand that plans often offer investments at 

lower cost than the typical retail fees charged by IRAs. Additionally, in 

light of the marketing efforts of IRA providers –which our website review 

found can include claims that IRAs are “free”—as well as the recent 

spotlight on 401(k) plan fees, highlighted by Labor’s new fee disclosure 

requirements, simply stating that fees and expenses could be “different” 

may not be sufficient. Such statements may not clearly convey to 

participants that they could pay more for investments outside of a plan or 

the long-term effect of higher fees on their retirement plan savings.

Moreover, IRS regulations do not require plans to provide the requisite 

distribution information when a participant is separating from employment 

with the plan sponsor; rather, the information is required within a specified 

window of time prior to receipt of a distribution. We identified no current 

legislative or regulatory requirements ensuring that participants receive 

timely information on their distribution options before they have made a 

 

83 73 Fed. Reg. 59,575, 59,577 (Oct. 9, 2008). The proposed rule was also responding to 

requirements in the Pension Protection Act of 2006 that Treasury modify its regulations to 

provide that any description in a notice to participants of their right to defer receipt of a 

distribution also describe the consequences of failing to defer such receipt. Pub. L. No. 

109-280, § 1102(b), 120 Stat. 780, 1056. 
 

Page 43 GAO-13-30 401(k) Plans

decision to take a distribution. There are also no requirements for plans to 

give participants comprehensive or balanced information comparing their 

options at the time of job separation. In lieu of regulations from IRS or 

Labor, experts told us that plans and their providers determine when 

participants receive such information. Although some service providers 

we interviewed said that they typically send separation packets as soon 

as participants separate from employment, since there is no requirement 

to provide a detailed packet at separation, participants cannot rely on 

getting the information they need in time to make a distribution decision. 

In fact, several service providers we spoke to said they do not provide 

information until the participant requests a distribution.

Many experts we interviewed said participants are also in need of concise 

and clear information on their rollover options. Information that plans and 

service providers give participants can be either too generic and without 

detail, leaving participants without an understanding of the key factors 

they need to know to make decisions about their savings, or too long and 

technical, leaving participants overwhelmed and confused. Several 

service providers told us that the limited scope of the information provided 

may not clearly inform participants of their options, including the option to 

keep funds in the current plan or to roll over to a new employer plan. 

About a fifth (14 out of 76) of the 401(k) plan sponsors who responded to 

our survey noted that they do not provide or do not know if they provide 

their participants with information about the option to roll over funds, upon 

separation, to plans with other employers.84

 

84 Because of methodological limitations associated with the survey conducted with 

PLANSPONSOR and Society for Human Resource Management, results from the survey 

represent only the views of the 76 survey respondents. See appendix I for further details 

regarding our methodology.

Without more complete, 

clear, and timely information on their distribution options, participants 

separating from employers will continue to be at risk of making illinformed decisions and may choose the administratively easier and more 

promoted route of rolling into an IRA instead of choosing other options 

that may be more beneficial. Providing a document that clearly lays out 

each of the four basic options a separating plan participant has puts the 

participant in a better position to determine the option that is in his or her 

best interest. The document could list factors beyond tax implications that 

experts said that participants should consider and could reference 

detailed information (for example, lists of questions consumers should 

ask investment professionals about fees, conflicts of interest, and
 

Page 44 GAO-13-30 401(k) Plans

standards of conduct). Among several factors highlighted in table 3 

above, which lists some key differences between 401(k) plans and IRAs

to consider when deciding whether to stay in a 401(k) plan or roll over 

funds into an IRA, some experts specifically highlighted that fees may be 

lower in plans than in retail IRAs (especially when retail brokerage fees 

are factored in), that fee disclosure requirements make 401(k) plan fees 

easier to identify than IRA fees, and that the fiduciary duties of a plan 

sponsor to a plan participant differ from those of an IRA investment 

adviser to a retail customer.

By law, Labor is charged with maintaining an outreach program to 

promote retirement income savings,85 including the creation of 

educational materials describing basic concepts related to retirement 

savings, and Labor provides such information for plan participants on its 

website. Additionally, Labor officials told us that the agency also 

disseminates some information through industry-based organizations. 

However, according to Labor officials, Labor does not reach out to plan 

sponsors to ensure that they give plan participants needed educational 

information specific to distribution options, nor does Labor reach out to 

plan participants directly. As a result, plan participants may not be aware 

of, or receive, Labor’s educational materials. Our review of Labor’s 

website found that there is valuable information on retirement plans for 

plan participants. However, since the information is not directly provided 

to them, plan participants would have to know about the website and 

know what to look for in order to find information on their distribution 

options.86

Participants of 401(k) plans make decisions to stay within the plan 

environment or roll over into IRAs based on the information available to 

them and the time and energy they have to take action. Unfortunately, the 

 

85 29 U.S.C. § 1146. According to Labor, its Saving Matters education campaign uses a 

variety of formats to inform plan sponsors and participants on the importance of saving for 

retirement through workplace retirement plans and the agency also reaches out to plan 

sponsors to make them aware of ERISA and to help them understand their fiduciary 

responsibilities. The agency also reports that every year its Benefits Advisors help 

hundreds of thousands of plan participants who call Labor with questions about their 

retirement plan, including benefits distributions.

86 We reviewed Labor’s website, specifically the page on consumer information for 

retirement plans, on January 19, 2013. 

http://www.dol.gov/ebsa/consumer_info_pension.html. 

Conclusions 
 

Page 45 GAO-13-30 401(k) Plans

effort they have to make to understand their options and pursue a course 

of action can be daunting. As a result, participants can be easily steered 

towards IRAs given the number of administrative obstacles and 

disincentives to staying in the plan environment and the pervasive 

marketing of IRAs by 401(k) service providers and IRA providers 

generally. Rolling over to an IRA can be a reasonable choice for many 

participants and, given the amount of money in IRAs, many individuals 

and former 401(k) plan participants appear satisfied with that option. But 

other options, such as staying in their current plan or rolling over into their 

new employers’ plans, may also be viable alternatives and could even be 

better options depending on an individual’s unique circumstances.

Currently, sponsors’ policies governing the accounts of separated 

participants and the processing of rollovers may serve as disincentives to 

staying in a plan or rolling assets to a new employer plan. In addition, 

sponsors’ practice regarding the process of accepting money from other 

plans can also create disincentives. Plan sponsors’ caution and confusion 

about IRS policies regarding the consequences of inadvertently accepting 

funds from non-qualified plans is especially puzzling given the agency’s 

clear guidance stating that a plan will not be at risk of losing its qualified 

status if it reasonably concluded that the distributing plan was qualified.

By working together to disseminate and clarify guidance, Labor and IRS 

can make it easier for plans to accept rollovers into their plans and can 

help ensure that each tax-preferred vehicle available to participants is 

easily accessible for them, enabling distribution decisions to be based on 

what best meets participants’ financial needs rather than on which tax 

deferred vehicle is easiest to roll into. Finally, the practice of sending 

direct-rollover checks to participants appears archaic when 

communications are increasingly conducted electronically. Restricting this 

practice can help participants avoid losing track of their retirement plan 

savings due to a misstep on their part, and can help shorten the time 

needed to complete a rollover and make plan-to-plan rollovers more 

efficient for everyone involved.

Our work has also demonstrated that 401(k) plan participants separating 

from their employers need help to obtain and understand information 

about the four distribution options and IRA products being marketed to 

them by providers. Providing information to participants about their 

options that is clear and in plain English, and easily understood and 

comparable, at a time when a participant is thinking about taking action 

with their retirement savings could be helpful. Requiring a summary 

document that explains to participants what their distribution options are, 

what factors they should consider when thinking about those options, and 
 

Page 46 GAO-13-30 401(k) Plans

steps they can take at the time they are considering their decisions, can 

help participants better understand what to do when changing jobs or 

retiring. Better information is obviously an important step in helping 

participants make decisions, although improving basic financial literacy in 

general, which includes helping participants understand fundamental 

concepts such as investing, is another important component that can help 

participants make important decisions to secure their retirement.

Additionally, although Labor has attempted to help plan participants 

understand the information they are given from providers, current 

requirements do not sufficiently assist participants in understanding the 

financial interests that service providers have in the distribution and 

investment decisions that participants make, nor sufficiently clarify the 

fiduciary responsibility that providers may have when providing 

assistance to participants who are in need of guidance. Requiring service 

providers to clearly disclose their financial interests in participants’ 

decisions and the extent of their fiduciary obligations can also help 

participants better understand providers’ roles and assess the guidance 

or information received from them. Moreover, resolving the uncertainty 

plans and providers face regarding activities that trigger fiduciary liability 

may help service providers provide better information to participants 

regarding their distribution options and assist them in making more 

informed decisions about their retirement savings.

Finally, Treasury has proposed regulations that would require a notice be 

provided to participants separating from their employer explaining the 

consequences of taking their money out of their 401(k) plan. The notice 

would specifically explain that investment options offered in a plan may 

not be available outside of a plan for the same cost. We previously 

recommended that the Secretary of the Treasury amend the applicable 

requirements of the department’s proposed disclosure rule to specifically 

require that service providers, when recommending the purchase of 

investment products outside retirement plans, inform plan participants 

that fees applicable outside their plans may be higher than fees 

applicable within their plans. Requiring that such a notice be provided to 

participants upon separation from their employer can help participants 

better understand that plans often offer investments at lower costs than 

can be found in retail investments, such as those in IRAs.
 

Page 47 GAO-13-30 401(k) Plans

We are making 5 recommendations based on our review.

To help reduce obstacles and disincentives to keeping retirement savings 

in the 401(k) plan environment, we recommend that the Commissioner of 

Internal Revenue and Secretary of Labor review policies that affect 

separating employees leaving retirement savings in an employer’s plan 

and, for those who choose to roll their distributions into another 401(k) 

plan, the process of plan-to-plan rollovers. As part of such a review,

• The Commissioner of Internal Revenue and the Secretary of Labor 

should review the lack of standardization of sponsor practices related 

to plan-to-plan rollovers and of policies affecting participants who 

leave plan savings in a former employer’s plan, with the aim of taking 

any regulatory action they deem appropriate. Such action could 

address obstacles like sponsors refusing to accept rollovers from 

other plans, and disincentives like plans restricting participants’ 

control over savings once they separate from the employer, and 

charging different fees for inactive participants. 

• The Commissioner of Internal Revenue and the Secretary of Labor 

should work together to communicate to plan sponsors IRS’s 

guidance on the relief from tax disqualification provided for plans that 

accept rollovers later determined to have come from a plan that was 

not tax qualified. In helping to better disseminate IRS’s guidance to 

plan sponsors, Labor may also provide feedback to IRS to help 

ensure that the guidance is clear and understandable, so that it 

adequately addresses plan sponsors’ concerns about their own plans’ 

qualified status and helps reduce delays in processing rollovers from 

other plans.

• The Commissioner of Internal Revenue should revise rules that allow 

plans and providers to send direct-rollover distribution checks to 

individuals rather than to the receiving entities to which the checks are 

written.

To help ensure that when plan participants separate from an employer 

and are deciding what to do with their retirement plan savings they 

receive adequate, timely, and balanced information, we recommend that 

the Secretary of Labor take the following actions:

• Develop a concise written summary explaining a participant’s four 

distribution options and listing key factors a participant should 

consider when comparing possible investments, and require sponsors 

to provide that summary to a participant upon separation from an 

employer. Should Labor conclude that additional statutory authority is 

Recommendations for 

Executive Action
 

Page 48 GAO-13-30 401(k) Plans

needed to take this action, it should seek that authority from the 

Congress.

• Finalize the agency’s initiative to clarify the ERISA definition of 

fiduciary, and, in doing so, require plan service providers, when 

assisting participants with distribution options, to disclose any financial 

interests they may have in the outcome of those decisions in a clear, 

consistent, and prominent manner; the conditions under which they 

are subject to any regulatory standards (such as ERISA fiduciary 

standards, SEC standards, or others) and what those standards mean 

for the participant.

We provided a draft of this report to the Department of Labor, Department 

of the Treasury, Internal Revenue Service, and the Consumer Financial 

Protection Bureau for review. Labor, Treasury, and IRS provided 

technical comments, which we have incorporated where appropriate. 

Labor and Treasury also provided written comments, which are 

reproduced in appendices III and IV, respectively. The Consumer 

Financial Protection Bureau did not have any comments. 

As stated in its letter, Labor believes its work regarding the definition of a 

fiduciary is key to addressing much of the concern raised in our report. 

We agree with Labor that a clearer understanding of when persons 

providing advice are subject to ERISA’s fiduciary standards will help to 

protect participants from conflicts of interest and self-dealing. Labor 

stated that a new proposed rule will be issued in 2013 addressing the 

circumstances under which a person is considered to be a “fiduciary” by 

reason of giving investment advice to an employee benefit plan or a 

plan’s participants. Labor also commented on our report section 

addressing these issues and noted that when advisers make specific 

recommendations to invest in particular investment products, it is critical 

that they adhere to ERISA’s fiduciary standards, particularly where 

conflicts of interest may exist. We agree with Labor’s conclusion that 

adherence to ERISA fiduciary standards is an important element in 

protecting plans and participants. Additionally, while we had previously 

pointed out that providers reluctant to become fiduciaries may limit the 

availability of investment advice as well as education to participants, we 

revised the section to better convey that upcoming clarification about the 

definition of a fiduciary, and about what constitutes investment advice and 

education, will help plan sponsors and providers understand what they 

can give to participants in different circumstances and should mitigate 

their concerns about assisting plan participants.

Agency Comments 

and Our Evaluation

GAO Response to Labor 

Comments 
 

Page 49 GAO-13-30 401(k) Plans

Overall, Labor generally agreed with our recommendations and will 

explore ways to implement them. Specifically, regarding our 

recommendation to develop a concise summary document explaining 

separating participants’ distribution options and require plan sponsors to 

disseminate the document to plan participants, Labor noted it will address 

the recommendation by evaluating its regulatory approaches within the 

constraints of its existing statutory authority. While ERISA does not grant 

Labor specific authority to require plan sponsors to provide such 

information, it does grant Labor broad authority regarding protection of 

participant benefits and the duties of plan fiduciaries. In response to 

Labor’s comment on this specific recommendation, we have added 

language indicating that should Labor conclude that additional statutory 

authority is needed, it should seek that authority from the Congress.

Regarding our recommendation to require service providers to disclose 

any financial interests they may have in a participant’s decisions and 

whether their assistance is subject to any standards as part of revising 

the interpretive bulletin on investment education, Labor commented that 

such activities should be part of the department’s efforts to amend the 

regulatory definition of fiduciary. Labor noted that because the current 

regulation addresses the circumstances under which a person becomes a 

fiduciary by reason of rendering investment advice for a fee, any 

proposed changes to that regulation could affect the types of information 

treated as non-fiduciary investment education under the interpretive 

bulletin. We concur with Labor’s assessment and revised our 

recommendations accordingly. 

With regard to our recommendation that the department review the lack of 

standardization among plans regarding plan-to-plan rollovers and 

participants leaving their savings in former employers’ plans, Labor noted 

that such plan design features historically have not been viewed as 

subject to Labor’s regulatory authority under Title I of ERISA, but have 

been subject to IRS oversight. As a result of Labor’s comments, we 

revised the recommendation to include the Commissioner of Internal 

Revenue. However, Labor noted that it would evaluate whether it has 

available regulatory approaches to address the recommendation. Given 

Labor’s broad oversight authority of plans and plan sponsors, we continue 

to believe that Labor is essential to addressing this recommendation in 

coordination with IRS.

Regarding our recommendation that Labor and IRS work together to 

ensure that plan sponsors are fully informed about IRS’ rules regarding 

plans’ acceptance of rollovers that are later determined to have come 
 

Page 50 GAO-13-30 401(k) Plans

from a non-qualified plan, Labor questioned the appropriateness of being 

included in the recommendation inasmuch as the interpretation of the 

IRC’s tax-qualification provisions related to acceptance of rollovers is not 

within Labor’s jurisdiction. Our recommendation focuses on IRS rules and 

guidance. However, given Labor’s broad oversight authority with respect 

to employer-sponsored plans, it is important that Labor help ensure that 

plan sponsors are aware of and understand IRS’ guidance. Therefore, we 

agree with Labor that it should assist IRS in its outreach efforts and 

suggest ways that newly issued guidance could be more clearly 

communicated to plan sponsors. To better clarify our intent for Labor’s 

role, we revised the recommendation to clearly convey that Labor’s role 

should be more centered on communication and outreach to plan 

sponsors. 

Treasury generally agreed with our recommendations and in its letter 

noted that the department and IRS can take steps to improve the rollover 

process so that more plan participants will be able to more easily roll over 

retirement assets to the their current employer’s retirement plan. 

Specifically, with regard to our recommendation that IRS and Labor work 

together to disseminate guidance for plan sponsors on the relief from 

disqualification when plans accept rollovers later determined to have 

come from a plan that is not qualified, Treasury noted that it will work to 

include our recommendation in its ongoing work to provide guidance 

facilitating rollovers into retirement plans.

Regarding our recommendation that IRS and Labor review the lack of 

standardization of plan-to-plan rollovers and participants leaving their 

savings in former employers’ plans, Treasury agreed that it is important 

that former employees be allowed to retain their savings in a former 

employer’s plan and described related actions the department has 

already taken. However, Treasury commented that it is not aware of any 

statutory basis for imposing a requirement that plans accept rollovers. 

Our recommendation makes clear that Treasury and Labor should review 

the lack of standardization of plan policies and practices related to planto-plan rollovers and leaving savings in a former employer’s plan with the 

aim of taking action within each agency’s purview. Doing so will help to 

reduce the obstacles and disincentives that plan sponsors may have and 

participants face related to plan-to-plan rollovers or leaving savings in a 

participant’s current plan. Policies and practices that may create 

obstacles and disincentives are not limited to a sponsor’s refusal to 

accept rollovers from other plans.

GAO Response to Treasury 

Comments 
 

Page 51 GAO-13-30 401(k) Plans

Finally, we recommended that the IRS revise rules that allow plans and 

providers to send direct rollover distribution checks to individuals rather 

than to the receiving entities to which the checks are written. We continue 

to believe that this is an action that needs to be taken, and in fact, some 

plans already process direct rollovers electronically. Addressing this issue 

can help to reduce unnecessary administrative obstacles for plan 

participants. Thus, IRS has a key role in helping to facilitate and 

encourage use of this practice.

As arranged with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from the 

date of this letter. At that time, we will send copies to the Secretary of 

Labor, Secretary of the Treasury, Commissioner of Internal Revenue, and 

Director of the Consumer Financial Protection Bureau. In addition, the 

report will be available at no charge on the GAO website at 

http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

me at (202) 512-7215. Contact points for our Office of Congressional 

Relations and Office of Public Affairs may be found on the last page of 

this report. GAO staff who made major contributions to this report are 

listed in appendix V.

Charles A. Jeszeck, Director

Education, Workforce, 

 and Income Security Issues
Appendix I: Objective Scope and Methodology

Page 52 GAO-13-30 401(k) Plans

During our review, our objectives were to identify some of the challenges 

plan participants separating from their employers may face (1) 

implementing a rollover, including plan-to-plan rollovers; (2) getting 

accurate and clear information about which distribution option to choose 

for their 401(k) plan retirement plan savings; and (3) understanding their 

distribution options. To answer these questions we undertook several 

different approaches.

To understand the rollover marketplace, we reviewed research and data 

from a variety of academic and industry-based sources. To understand 

the extent of laws and regulations on the rollover process we reviewed 

federal laws and regulations pertaining to 401(k) plans and IRAs, and met 

with government officials from the Department of Labor, the Department 

of the Treasury, the Internal Revenue Service, and the Consumer 

Financial Protection Bureau to understand their perspectives on relevant 

legal issues. The effect of existing laws and regulations on the rollover 

process was also a focus of our interviews with 401(k) plan service 

providers and 401(k) plan sponsors. To understand the role of 401(k) plan 

service providers in participants’ decision-making processes when they 

separate from plans, we conducted structured interviews with 401(k) plan 

service providers. We solicited input through 29 interviews, including the 

largest service providers, in terms of assets under management. During 

our interviews we requested samples of information provided to 

participants. We received sample materials from 8 interviewees and we 

reviewed them for size and content. In addition, with the help of The 

SPARK Institute, Insured Retirement Institute, and Securities Industry and 

Financial Markets Association, which are all industry-based membership 

organizations, we collected written responses to questions used in our 

interviews from 25 service providers that offer a range of services, 

including recordkeeping, rollover processing, participant education, and 

individual IRA products.

To understand 401(k) plan sponsors’ perspectives on the rollover process 

and the role of plans and their service providers in the rollover decision 

and process, we conducted a nongeneralizable survey facilitated through 

two member organizations, PLANSPONSOR and the Society for Human 

Resource Management. We received a total of 76 responses to our 

survey and we also interviewed 5 plan sponsors. Of the 5 plan sponsors 

interviewed, 2 represented small plans, 2 represented medium-sized 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objective Scope and Methodology

Page 53 GAO-13-30 401(k) Plans

plans, and one represented a large plan.

1

To further understand factors affecting participants’ decision making when 

they separate from an employer, we reviewed data and reports from 

several industry sources. We obtained and reviewed survey data from an 

industry consulting company, Spectrem Group. This company conducted

a survey of individuals who had the opportunity to roll over a plan balance 

from a qualified employer plan within the prior 2 years. The survey was 

designed to, among other things, identify preferences and sources of 

information for those making rollover decisions. The survey data were not 

generalizable, according to GAO standards for statistical reliability, and 

statements made describing those data reflect only the experience of the 

940 individuals who responded to Spectrem Group’s survey. The 

available methodological documentation does not allow us to fully assess 

the quality or reliability of the survey data. For this reason, we cannot 

assess how accurate or precise the estimates are and readers should be 

cautious in drawing conclusions about how the population of individuals 

eligible to roll over would act. We also obtained and reviewed industry 

reports from the Financial Research Corporation, Cogent Research, and 

Cerulli Associates.

Our survey outreach was 

broad; PLANSPONSOR included information on our study in an e-mail 

that was sent to approximately 67,000 of its members and the Society for 

Human Resource Management sent an e-mail to 1,012 of its members. 

Through the survey we asked how information is provided to separating 

plan participants, who provides the information, the content and format of 

information, and the role of sponsors and service providers. To further 

understand what information sponsors and service providers give to 

participants when they separate from employment, we also requested 

that sponsors responding to the survey and participating in interviews with 

us provide samples of the information they provide. We received sample 

materials from 5 survey respondents and 2 interviewees and we reviewed 

them for size and content. 

To assess the content and availability of information available to 

individuals, we reviewed 10 IRA providers’ websites for account fees and 

rollover promotions. The providers were chosen based on the largest 

providers in terms of IRA assets under management, largest share of 

 

1 We defined small plans as those with under 100 participants, medium plans as those 

with 100-4,999 participants, and large plans as those with 5,000 or more participants.
Appendix I: Objective Scope and Methodology

Page 54 GAO-13-30 401(k) Plans

rollover assets, and largest retirement plan asset managers. To develop 

figure 6, we selected the IRA rollover application for one of the largest 

IRA providers, in terms of assets under management, and counted the 

pages contained in all the separate documents listed on the signature 

page of the application, where an applicant is told they should read and 

understand those documents. That page indicates that the applicant 

should read the prospectus for any investment they might want to make 

outside the default money market fund. To reflect what reading might be 

required to review a separate investment, we counted the pages in one 

target date fund offered by the same IRA provider and counted the pages 

common to the target date fund family of funds regardless of target year, 

such as Shareholder Information. We chose a target date fund, because it 

is a likely choice for an investor seeking to simplify their investment 

decisions while achieving a mix of equity and fixed income assets. To 

develop figure 7, we used text from an IRA rollover application as well as 

the prospectus for a target date fund, which is a likely choice for investors 

seeking to simplify their investment decisions while achieving a mix of 

equity and fixed income assets, deleted proprietary names, and input the 

text in the word cloud generator at www.wordle.net. The website 

eliminates numbers and commonly used words like “a” and “the”. We also 

investigated the guidance and information 401(k) plan service providers 

give to individuals who call them. To do this, our investigative unit placed 

calls to 30 401(k) plan service providers, including those with the largest 

401(k) plan assets under management and 27 of which also offer IRAs, 

including the largest IRA providers. Our undercover caller asked about 

rollover options and IRA costs.2

We also reviewed financial literacy literature and interviewed financial 

advisers and other experts to better understand the challenges faced by 

participants regarding distribution options and decisions.

The caller said he was starting a new job 

at a company that uses the company he called to administer its 401(k) 

plan and he wanted information about what his different options were for 

his savings at his old plan. He asked about pros and cons for different 

options, the rollover process, and investment options and fees. We 

established an e-mail account to which several providers sent follow-up 

emails and supplementary information. The recordings of the calls were 

transcribed by a professional service outside GAO. 

 

2 View a video of our undercover phone calls to 401(k) plan service providers at 

http://www.gao.gov/multimedia/video/GAO-13-30/1. 
Appendix I: Objective Scope and Methodology

Page 55 GAO-13-30 401(k) Plans

We conducted this performance audit from May 2011 to March 2013 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for findings and 

conclusions based on our audit objectives. We conducted our related 

investigative work in accordance with standards prescribed by the Council 

of Inspectors General on Integrity and Efficiency.
Appendix II: IRS Model 402 (f) Special Tax 

Notice

Page 56 GAO-13-30 401(k) Plans

Appendix II: IRS Model 402(f) Special Tax 

Notice 
Appendix II: IRS Model 402 (f) Special Tax 

Notice

Page 57 GAO-13-30 401(k) Plans
Appendix II: IRS Model 402 (f) Special Tax 

Notice

Page 58 GAO-13-30 401(k) Plans
Appendix II: IRS Model 402 (f) Special Tax 

Notice

Page 59 GAO-13-30 401(k) Plans
Appendix II: IRS Model 402 (f) Special Tax 

Notice

Page 60 GAO-13-30 401(k) Plans
Appendix II: IRS Model 402 (f) Special Tax 

Notice

Page 61 GAO-13-30 401(k) Plans
Appendix II: IRS Model 402 (f) Special Tax 

Notice

Page 62 GAO-13-30 401(k) Plans
Appendix II: IRS Model 402 (f) Special Tax 

Notice

Page 63 GAO-13-30 401(k) Plans
Appendix III: Comments from the Department 

of Labor

Page 64 GAO-13-30 401(k) Plans

Appendix III: Comments from the 

Department of Labor
Appendix III: Comments from the Department 

of Labor

Page 65 GAO-13-30 401(k) Plans
Appendix III: Comments from the Department 

of Labor

Page 66 GAO-13-30 401(k) Plans
Appendix III: Comments from the Department 

of Treasury

Page 67 GAO-13-30 401(k) Plans

Appendix IV: Comments from the 

Department of the Treasury
Appendix III: Comments from the Department 

of Treasury

Page 68 GAO-13-30 401(k) Plans
Appendix III: Comments from the Department 

of Treasury

Page 69 GAO-13-30 401(k) Plans
Page 70 GAO-13-30 401(k) Plans

Charles A. Jeszeck, (202) 512-7215 or jeszeckc@gao.gov

In addition to the contact named above, Tamara Cross (Assistant 

Director), Mindy Bowman (Analyst-in-Charge), Katie Berman, and Angie 

Jacobs made key contributions to this report. James Bennett, Paul 

Desaulniers, Lauren Gilbertson, Susan Offutt, Kathy Leslie, Doug Manor, 

Ashley McCall, Marylynn Sergent, Jessica Smith, Frank Todisco, Walter 

Vance, Kate van Gelder, and Craig Winslow also provided support.

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(131088)
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