Millions of retirement savers may actually lose money by not rolling over assets from 401(k) plans to IRAs, according to research from the American Action Forum, a Washington D.C.-based nonprofit think tank.

Meghan Milloy, director of financial services policy for the forum, which promotes free market solutions in the effort to reduce the federal government’s footprint, recently posted an argument showing retirement savers could collectively lose $4.2 billion each year by not rolling over assets to an IRA.

That flies in the face of a core rationale behind the Department of Labor’s fiduciary rule: that the cost of managing 401(k) assets is inherently cheaper than costs charged on IRA accounts.

The rule’s Best Interest Contract Exemption will make any advice to roll 401(k) plan assets over to an IRA a fiduciary act, and will subject advisors recommending the move to extensive new disclosure requirements, and potentially, private class-action claims if investors’ best interests are not served by a rollover recommendation.

Advisors charging a level fee on rolled over assets, or a cost on IRA accounts equal to what was charged on assets in the 401(k), will still have to comply with the best interest contract exemption in that they will have to document why rolling assets into an IRA is in an investor’s best interest.

The rule is expected to affect the $7.4 trillion IRA market by discouraging advisors from recommending rolling assets out of a 401(k) plan and into a tax-deferred retail account.

Rollovers from defined contribution plans have fueled IRAs, some form of which are owned by 40 million households. In 2013, 86 percent of traditional IRAs were opened with rolled-over assets, according to the Washington, D.C.-based Investment Company Institute. And “financial professionals” were the primary source of information in half of the rollovers made in 2015, far more than were employers or any other information outlet, ICI says.

A look at the data

While the Labor Department and the White House have argued an industry-wide fiduciary standard is necessary to address the billions they say investors lose annually to conflicted advice in IRAs, Milloy argues the contrary: that restricting rollovers will prove costly to retirement savers, particularly those with low account balances.

She uses Social Security and employment data, and information on average 401(k) account balances to show that the three million Americans per month that retire or change jobs would pay more in fees leaving assets in plan.

Milloy puts an average cost on 401(k) assets at 1.5 percent, or $1,375 on a balance of $91,800—the average balance for participants in plans administered by Fidelity Investments. By multiplying those fees with the number of Americans retiring or changing jobs, Milloy arrives at the conclusion $4.2 billion is lost by leaving assets in 401(k) plans.

That assumes the cost of rolling assets over to an IRA would be free. While many brokerages don’t charge an annual fee, some assets in 401(k) plans, like institutional share classes of mutual funds, would have to be liquidated and repurchased in retail shares to reside in an IRA.

Nonetheless, Milloy’s argument calls into question the presumed cost advantage 401(k) plans have over IRAs. Participants pay a huge disparity in 401(k) costs, most of which can be accounted for by plan size. Mega plans with more than $1 billion in assets pay an average of less than 50 basis points, according to 401(k) analyzer Brightscope, well below the 1.5 percent Milloy uses.

But some micro plans with as little as $1 million in assets pay as much as 4.5 percent in fees. On average, participants in plans with less than $10 million in assets pay less than 2 percent.

Brightscope’s data shows fees are all over the place; even some plans with $100 million in assets are paying as much as 2.5 percent.

Effect on small plans

Of course, the vast majority of investors with 401(k) savings are in small plans. According to the Washington, D.C.-based Employee Benefits Research Institute, about 67,000 plans, or roughly 93 percent of all 401(k) plans, have less than $12.5 million in assets.

Many are no doubt paying more than the 1.5 percent on assets Milloy uses in her calculation. By comparison, the ICI says the average IRA expense is 71 basis points, or 0.71 percent of assets.

Milloy said she is planning to examine the rule’s effect on rollovers, and its impact on investors, more in depth. But the presumption that leaving assets in a 401(k) plan is always cheaper is part and parcel to what she says is the questionable data and reasoning behind the Labor Department's rule.

“I respect the DOL,” Milloy told BenefitsPro in explaining her recent research. “But there was so much push from this administration to advance its regulatory agenda. There was undue influence on regulators to get something done.”

As advisors to and providers of IRAs are likely to shift to a fee-based level of compensation to comply with the best interest contract exemption, Milloy says that raises the specter of duplicative costs to investors: Many have already paid commissions on investments they plan to hold; now they will be charged a fee on total assets, in effect incurring a second charge for investments they already own.

“The bottom-line is this rule is going to be costly to investors,” said Milloy.

Lawsuits against the Labor Department — there are now five — not only have merit but also stand a reasonable chance of succeeding, said Milloy, a lawyer by trade.

She points to the decision last April in U.S. District Court for the District of Columbia to strike down the Financial Stability Oversight Committee’s designation of MetLife Inc. as a systemically important financial institution.

In her decision, U.S. District Judge Rosemary Collyer said regulators’ decision to designate the insurer as systemically important was “fatally flawed,” “unreasonable,” and failed to fully consider the costs to comply with the designation.

Collyer also said FSCO “focused exclusively on the presumed benefits” in designating MetLife as systemically important.

'Regulatory overreach'

“What we see in the DOL rule is what we saw in the MetLife case,” said Milloy. “There has been so much regulatory overreach by this Administration, and not enough cost benefit analysis by the agencies.”

That claim — that the Labor Department failed to execute an accurate cost-benefit analysis of its rule, as required under the Administrative Procedure Act — is central to all of the claims brought against Labor Department thus far.

Secretary of Labor Thomas Perez has said that legal challenges to the rule “don’t have a legal leg to stand on,” and has defended the rule-making process as “impeccable.”

The more than five years it took to finalize the rule is indicative of the Labor Department's thoroughness, and the genuineness of it effort to work with industry to craft a workable fiduciary rule, Perez has routinely said.

But the length of that process does not prove the validity of Labor Department's cost benefit analysis, says Milloy.

“Time is not the only indicator there,” she said.

In estimating the cost of conflicted advice at $17 billion annually, White House economists used “off the top” math that is representative of the “disconnect” between the Obama White House and the role of regulators, said Milloy.

Instant Insights /

Keeping assets in plan will cost participants, says think tank

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