Workers receive some information regarding their 401(k) savings when they separate from an employer, but approximately 80% of the retirement plan participants are not aware that they have distribution options, according to a report released Wednesday from the US Government Accountability Office.
And those options come with varying tax effects that could affect the savings that workers have available to put toward long-term care in their retirement.
The IRS requires 401(k) plans to provide a “402(f) special tax notice” to participants who leave their jobs and are looking to cash out their plans. The form alerts participation to the tax consequences of accessing those funds.
The results of the GAO’s survey, conducted in January, show that not everyone receives that information in a timely manner, however.
“Of the eligible participants who received ‘unsolicited written information’ (used as a proxy for the 402(f) notice) from their old plan after leaving their jobs, about one-third received it before they made a decision about their 401(k) savings, but about 15% received it after they made a decision,” the GAO said. “The remaining participants either received the notice at the time they made a decision or did not know when they received the notice. As a result, not all eligible participants received information from the notice in time to inform their decisions about their retirement savings.”
Oftentimes, according to the report, participants erroneously thought that their only options were to roll their funds over to another plan, set up an IRA or cash out their money
About half of the participants in the survey said they were unaware that they had the option of keeping their funds (greater than $5,000 at the time of the survey) in their established 401(k) plans after leaving a job.
“Notice requirements do not require plans to inform participants that they can leave their savings in their old plan. This lack of awareness can hinder participants from making informed decisions about their plan savings,” according to the report.
Federal agencies can help mitigate the shortcomings of the 402(f) notice, the GAO said. For example, the agency recommends that the Treasury Department make some changes to the notice to include clear and concise information about participants’ distribution options and the related tax consequences. Additionally, according to the GAO, Treasury should address the timing requirement so that participants receive the information as soon as possible after leaving their jobs.
The GAO also called on the Department of Labor to ensure that employees receive easily understandable information about all distribution options and the associated tax consequences.
“Specific actions we stated that DOL could take include implementing the ERISA Advisory Council’s (EAC) 2015 recommendation, exploring a joint-agency effort with Treasury to update the 402(f) notice, or other steps that would help plans develop clear and concise communications to inform participants,” the report said
