Don’t Let Money in Motion Cause a Breach

July 8, 2014 ( – Rolling assets out of a plan is a broad area that affects plan advisers, consultants, participants and fiduciaries in 401(k) plans, says Jerry Schlichter.

The first thing to consider is whether the person involved in the rollover is a fiduciary, according to Schlichter, a 401(k) fee litigation specialist with Schlichter Bogard & Denton. If so, then obviously the law comes into play, and the broker/dealer (B/D) is obligated to do more than simply try to make a sale, he tells PLANSPONSOR.

Service providers, advisers and broker/dealers have many different ways to intersect with 401(k) plan participants, Schlichter says, and participants can get bumped about in ways that do not benefit them—and could open the plan sponsor to some fiduciary liability.

“The plan sponsor has no obligation to advise participants on how they might roll over their 401(k) assets, or whether they should roll them over,” Schlichter says. But, like the good Samaritan, he says, if the plan sponsor does step in to help, it should be in a responsible way. If a large mutual fund company or recordkeeper is coming in to offer rollover options, the plan sponsor will need to perform additional work to check the quality of the offerings.

Providing access to service providers in a 401(k) plan can be dangerous. “There’s a potential for abuse and for steering participants to a particular provider or program,” Schlichter says. “If the plan sponsor provides access to someone pushing IRA [individual retirement account] products, that raises the question of whether there is a fiduciary breach,” he says. The plan sponsor should monitor communications to participants with an eye out for the following red flags.

Is the company pushing particular products? Does the information include a cafeteria menu of options, including to remain in the plan or to move assets into another sponsored plan? If IRAs are being discussed, participants should be offered a range of them, from different providers. Schlichter says communications to participants should hit all three of these marks.

Providing access to 401(k) participants has value, Schlichter points out, and that value should be captured for the benefit of the plan participants. A plan with 20,000 employees could have a retirement or separation rate of 5% each year. Outside entities or service providers would pay money for the sales opportunity of reaching 1,000 people, he says.

Making information about rollovers from a 401(k) plan available is generally acceptable, Schlichter says, but when the fiduciary of the plan—the adviser, for instance—recommends a particular IRA rollover company or program, or favors one over the others, this could open a fiduciary breach for the plan sponsor, if it is their fiduciary who is involved.

Some plan sponsors are aware that fiduciaries are directing participants, and some are not. IRAs are aggressively marketed because they are so profitable, Schlichter says. “The opportunity for service providers to sell their own products can create an incentive to steer participants to products that don’t necessary serve the participants’ best interests,” he says.

Some of the areas that service providers operate in are somewhat gray, Schlichter says, and, for the most part, participants do not distinguish between fiduciary and non-fiduciary providers. When someone gives them information, they tend to believe it is being given in their best interests.

Another potential tripwire involves investment share classes, Schlichter says. Most participants in a 401(k) plan gain access to institutionally priced shares, since the typical plan holds enough assets to enable institutional rates. But when assets are rolled over into an IRA, it is generally into retail shares, which alone would make it disadvantageous for the participant.

If the employee is moving to a new employer, the options should include staying with the former 401(k) plan if it is a good plan. Schlichter recommends comparing the new plan with the old, as well as comparing the new plan with the IRA. A report by the Government Accountability Office (GAO) last year found that over one-third of plan service providers charged participants to roll over their assets. (See “Plan-to-Plan Rollovers Should Be Easier, GAO Says.”)

The GAO report highlighted that fee information for IRAs is often difficult to locate and understand. “Often, the fee structures are complex and difficult for the average participant to decipher,” Schlichter says. According to the GAO, the representative pushing IRA products often made misleading statements, such as claiming an IRA had no fees or that he was offering free plans. Cash bonuses may seem like upfront benefits but have to be considered against the other factors, such as fees and share classes.

The top thing to watch out for, Schlichter says, is advising participants to get into an IRA when something else might be a better option for them. “If there’s going to be movement out of the 401(k) plan into something else, there should be a presentation of options from an adviser to avoid exposure,” he says. The plan sponsor should be wary of advisers pushing employees into an IRA from which the adviser benefits.