GAO Warns on Misleading 401k Rollover Info

How to avoid a 401k rollover mistake: Internet Scambusters #562

When it comes to switching jobs, are you getting accurate advice on whether and how to transfer your retirement investment — better known as a 401k rollover?

The Government Accountability Office (GAO) thinks not — at least with some financial advisers.

That could lead to a costly mistake, as we explain in this week’s issue.

Let’s get started…

GAO Warns on Misleading 401k Rollover Info

Trying to plan for a secure retirement is tough enough in today’s shaky economic environment, but when you have to make additional decisions like whether or not to do a 401k rollover, you risk being misled, intentionally or otherwise.

That’s the warning from the Government Accountability Office (GAO) in a new study of the rollover process.

Put simply, a 401k rollover is a transfer of tax-advantaged funds and investments in your employer-sponsored retirement plan into either another 401k or an IRA — an Individual Retirement Account.

With a 401k, the investment options are usually selected by the employer; with an IRA, individuals are responsible for selecting and monitoring their own investments.

A 401k or IRA may be managed by exactly the same service provider. It’s just a different arrangement, but IRA fees can be higher.

Usually a rollover happens when an individual changes jobs and leaves the employer where the original 401k was set up.

However, that individual may also be able to leave that 401k with their old employer when they move on and collect from it later, when they retire.

By using these options, rather than cashing out, you retain the tax advantages, but which should you choose?


First, let’s issue an important disclaimer:

Scambusters does not give financial advice and we are not responsible for any investment decisions you make. You should seek advice from a qualified professional when making investment decisions.

We just want to pass on the GAO warning, so you can make your own informed decisions and avoid being misled.

GAO Concerns

Here are the main points of their concerns:

  • The actual system as currently set up is weighted in favor of IRAs because other options take longer to implement and involve more paperwork.That’s not the IRA providers’ fault but it does work in their favor.”That difficulty may discourage participants from keeping their savings in the (401k) plan environment, which generally has lower fees,” says the GAO.
  • Service providers, who naturally benefit through their fees if a 401k is rolled over into their IRA management service, don’t always give impartial advice.Says the GAO: “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.”
  • Some telesales operators working for service providers encourage the switch to IRAs when they have little or no knowledge of the financial circumstances of the individual they’re calling.Sometimes, they don’t even mention the option of leaving funds in the old plan.The GAO has posted a video of examples of the sort of issues they encountered when their investigator posed as someone about to start a new job, enquiring about joining their new employer’s 401k.
  • Supposed educational materials, intended to explain participants’ options, sometimes contained information that actually appeared to promote financial products that the service provider offered.

Proceed With Caution

So, what can you do to make a better-informed decision?

Most of the action GAO is calling for is directed at improvements by employers, government and service providers but if that ever happens — and, let’s face it, that could be a long way off — it’s still going to be up to you to look after your best interests.

So, here are some of the actions you can take if you’re leaving your current job with a 401k:

  • Don’t automatically assume that a rollover into an IRA is the right option. Make the time to explore your options thoroughly.
  • Download the full GAO report, which explains a lot of the technicalities and differences between IRAs and 401ks, as well as the pitfalls you might encounter in making your rollover decision:
  • Find out the 401k options your current employer (the one you’re leaving) offers.
  • Likewise, identify the 401k options with your new employer.
  • Make sure you then know and understand the comparative costs and fees associated with your 401k and IRA.
  • If you don’t understand or you’re not sure what to do, seek independent financial advice from a professional you know and trust — even if you have to pay for this advice.
  • Don’t be panicked or impatient. Transferring one 401k to another usually takes longer than a 401k rollover into an IRA — but that alone should not be the deciding factor for action. However, make sure you understand all deadlines, penalties and fees clearly.

Above all, remember that this is your money and your future. When it comes to a 401k rollover, it pays to educate yourself, exercise caution and seek advice from people you know you can trust.

NOTE: To repeat our earlier disclaimer, the information above does not constitute financial advice.

Time to conclude for today — have a great week!