Rock and Rollover

As the job market improves, more workers are leaving old jobs for new ones. According to the Labor Department’s Job Opening and Labor Turnover survey (JOLTS) the number of voluntary quits increased by 15 percent at the end of May. Upon departure from your old employer, one of the big decisions to make is what to do with your retirement plan. There are generally three choices: leave the money in the old plan; rollover the funds from the old plan into the future employer’s plan; or rollover the funds into a IRA account at a brokerage or mutual fund firm. To determine which option is best, you have to do a little homework. The first step is to figure out the fees you are paying in your current plan and compare them with the details of the new plan. While there has been more publicity about the high costs of investing inside of employer-sponsored plans, including last year’s terrific PBS episode of Frontline called "The Retirement Gamble", many people still don’t realize that fees among plans and the specific investments within the plans, can vary dramatically.

If the old plan offers plenty of choices at a reasonable expense level, and the new plan is an expensive one, you may be better off staying put. But increasingly, more Americans who are retiring or moving onto new jobs are transferring the assets from old plans into individual retirement accounts (IRAs). According to financial-services research firm Cerulli Associates, investors moved $321 billion from employer-sponsored plans to individual retirement accounts in 2012, up about 60 percent in the past decade.

Some of these investors want the freedom to control where they put their money and want to increase the number of asset class options inside their retirement accounts. However, many have fallen prey to the financial services industry, which has waged a competitive war for retirement dollars that aims to retain and capture retirement assets. Some firms offer cash incentives to roll over assets, while others offer a variety of “bonuses” that can seem too juicy to turn down. As a result, some investors are being unknowingly lured into products that contain higher fees than the plain vanilla index fund found in their old employer’s plan.

Because the government oversees and enforces most employer-based retirement plans there is a keen interest in how rollovers are handled. Specifically, the feds are concerned that the advice to move assets from an employer plan into a new product inside an IRA, may be "suitable" for investors, it may not but not in their best interests.

The distinction brings up the “F-Word”, or the fiduciary standard, which requires financial professionals to act in the best interests of their clients. You may think that any broker or insurance agent is obligated to do so, but they are generally held to a much looser standard, called “suitability.” In other words, the product or advice they are providing needs only to be suitable for you, rather than in your best interests.

Both the Department of Labor Securities and Exchange Commission (SEC) have been wrestling with whether to extend the fiduciary standard of care to any financial professional that provides personalized investment advice to retail customers, including those individuals and firms who make retirement plan recommendations. Last year the U.S. Government Accountability Office found that financial companies that administer 401(k) plans misled GAO investigators posing as employees leaving their jobs, telling them they would almost always be better off if they shifted to IRAs that the companies also managed.

Not surprisingly, the Securities Industry and Financial Markets Association (SIFMA), the trade association that lobbies on behalf of the financial services industry, has opposed imposing regulation that would be too strict, because it would “limit consumer choice”. The more cynical will note that the fiduciary standard would put a big dent into commissions generated by firms and their salespeople, especially those who recommend fee-rich products inside rollover accounts.

Before you transfer assets from retirement plans into IRAs, make sure that you understand the costs involved. You may find that the boring old 401(k) plan is the more efficient – and less complicated – option.

Why everyone should watch "The Retirement Gamble."

I get a lot of questions these days about my opinion of the recent PBS episode of Frontline called "The Retirement Gamble." The program details America's retirement crisis, highlighting some of the facts that I have written about in this column, including: one in three Americans has no retirement savings at all; one in two say that they can't save enough; and the demographics of an aging population are making matters worse. But the documentary goes one step further in pointing a finger directly at the financial services industry. Frontline accuses major financial companies of feasting on high fees inside of many employer-sponsored plans, pushing retirees into products that may be "suitable" but not in their best interests, and providing murky disclosures about the funds and annuities that they urge the public to buy.

The roots of the "Retirement Gamble" were planted in the early 1980s when 401(k) plans were first introduced. At that time, American workers were mostly covered by company-provided pension plans, and the new fangled 401(k) was designed to supplement pensions, not replace them. But companies soon seized the opportunity to reduce costs and dumped the long-term liability of employee pensions. Within a few years, the 401(k) became the go-to retirement vehicle.

At the time, few people saw the advent of the new plans as a massive risk transfer from corporations to employees, but that's exactly what happened. After all, corporate America was not about to tell workers, "Hey, instead of your boss paying into a guaranteed retirement plan, the risk of making contributions and managing your retirement money is entirely on you!!"

It has taken everyone a long time to wake up to this fact because of market timing: 401(k)s took hold at the beginning of the biggest bull market in history for stocks and bonds. Even as markets hiccupped every now and then from 1982-2007, they often rebounded quickly, masking the larger risks that plan participants were bearing and generally diminishing people's respect for investment prudence.

Flash forward to the present, where countless retirees and would-be retirees have discovered those risks up close and who are trying to rescue their now-depleted retirement accounts.

In the past, I would have taken a moment like this to extol the virtues of financial literacy. But my opinion on that front has shifted after interviewingHelaine Olen, author of "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry." Olen notes that financial literacy really does not help change the basic facts: Some of the best-educated people still make lousy financial choices, and "sometimes bad financial events can happen to us."

One of the problems with literacy efforts is that they are often financed by big financial institutions, whose motives may be suspect. Many of these big companies promote their public education projects, while they continue to sell murky, complicated products at the same time.

The industry is not just fooling investors -- in some cases, it is fooling itself. When Frontline asked Michael Falcon, the head of retirement for J.P. Morgan Asset Management, about the negative impact that mutual fund fees have on investors' returns and whether putting clients' interests first is a better model, he seemed to be at a loss for any reasonable response.

But the most cringe-worthy part of the program goes to Christine Marcks, the head of Prudential Retirement. When Frontline correspondent Martin Smithasked Marcks about the evidence that most actively managed mutual funds fail to beat index funds, her response was, "Yeah, I haven't seen any research that substantiates that. I mean it -- I don't know whether it's true or not. I honestly have not seen any research that substantiates that."

That is an astounding response. Marcks could have evaded the question and said that actively managed funds might beat the indexes from time to time, which is why retirement plan investment consultants exist -- to find the best funds available. But to insist that she hadn't seen any research is simply not plausible. In that one response, she became the poster child for what's wrong with the industry and why everyone should watch "The Retirement Gamble."

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