Rollovers

Why is my 401(k) plan provider so eager to keep me?

Your 401(k) provider is uniquely positioned to help with a rollover when you’re ready to retire or switch jobs. The firm knows your age, how much money you have, and how you like to invest. And it hears from payroll that you’ve left your job.

“That would trigger an alert for outreach,” says Sophie Schmitt, an analyst at Aite Group, an investment industry researcher. “It’s a no-brainer. You get a letter or you get a call.” The soft sell might sound like this letter from Fidelity: “I’m ready to answer any questions you might have about your retirement savings options and possible next steps.”

That inside track can pay off. Schwab says it achieves a 50% retention rate for IRA rollovers on its main 401(k) platform. Other leading plan providers, including Vanguard and Fidelity, don’t report their figures, but Alison Borland, vice president of retirement solutions and strategies at Aon Hewitt, believes their rates are similar. “The providers make it seem like a natural step,” she says. “It feels like a place to trust.”

Plan providers point out that they play a vital role as retirees face the difficult task of converting savings to income. Investors “are coming to us at a point that is incredibly emotionally charged,” says John Sweeney, executive vice president of retirement and investing strategies at Fidelity. “They are asking us for this help.”

Borland says companies don’t always take such a rosy view of plan providers reaching out. “Some come to us because it makes them uncomfortable,” she says. “They want plan providers to help participants, not sell them things.”

Your 401(k) provider has a strong incentive to bring you in-house. IRAs, which require less bookkeeping, are far more lucrative than workplace plans. In 401(k)s, Wall Street firms earn about 20¢ in profits on ­every dollar of investment and administrative fees they collect, says Peter Demmer, chief executive of Sterling Resources, a consultant to plan providers. IRA profits are roughly double that. “It’s twice the pay for half the work,” he says.

Having your 401(k) provider weigh in on a rollover opens you up to potential hazards. For starters, you can’t trust everything you hear. In 2013 the Government Accountability Office, Congress’s nonpartisan investigative arm, had an undercover investigator call 30 plan administrators while posing as a worker looking for advice on an old 401(k).

Often the message was firmly pro-IRA. A third of reps suggested a rollover for the caller, the GAO re­ported, “without specific knowledge of his financial circumstances.” Some cast doubts on his ability to stay in an old plan—you almost always can as long as your 401(k) is worth more than $5,000. About a third suggested he couldn’t roll over into a new employer’s plan, another common option.

Regulators took note. Both FINRA, the brokerage industry’s self-regulatory body, and the Securities and Exchange Commission said rollovers would be a priority when they examined financial firms for 2014. And the Labor Department has said that it will renew its efforts to make sure those advocating a rollover are “fiduciaries,” meaning their advice would have to be in your best interest, vs. simply “suitable”—but not until next year. That effort has been stalled in no small part because of industry lobbying. (As long as you’re in a 401(k), your investments are overseen by a fiduciary.)

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