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Plan Sponsors, Vendors, Report Modest Rollover Activity Attributable to EGTRRA

Last year's tax law changes may have made retirement savings plans more portable, but plan sponsors and plan providers say the new legislation hasn't prompted big changes in where investors are parking their retirement assets.

"During the first month or two of the new year, there was a fairly significant amount of (rollover) activity," says Robert Barkin, vice president of corporate communications for ICMA Retirement Corp., which manages defined contribution retirement savings plans for about 5,500 employers nationwide. "Since that time, the volume has decreased significantly. It really came in under our forecasts."

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which took effect at the beginning of this year, made it substantially easier for investors to transfer their retirement savings from one plan to another after they change jobs or retire. Prior to EGTRRA, tax law restricted rollovers of assets in 401(k) and 403(b) plans to the same type of plan or to an Individual Retirement Account (IRA). And assets in 457 plans could only be transferred into other 457 plans. Now, assets in any of those types of plans can be rolled into any other type of plan in the event a participant changes jobs, or into an IRA. In addition, IRA assets can now be rolled into employer-sponsored plans.

Barkin theorizes that much of the early rollover activity that took place in the plans it administers was attributable to pent-up demand. "I think a lot of the demand was from people who had accounts with other financial services organizations, and their broker was telling them, 'Let's take care of this first thing,'" Barkin says. He adds that the legislation also created a degree of confusion among plan participants; some in ICMA-managed 457 plans were under the impression that they had to take their money out of those plans once they were no longer employed by the sponsor. "When we talked to them, we'd say 'No, that's not the case,' and even point out that there are certain advantages to keeping money in a 457 rather than an IRA," Barkin says. Among those advantages, he says, is the fact that distributions from a 457 plan prior to age 59 ? are not subject to the 10% penalty such as the one levied on similar distributions from an IRA or 401(k) plan. Of those ICMA investors who did rollover their 457 plan assets, he says, "a large majority" steered the money into IRAs, including, often, IRAs managed by ICMA. "We even created our own IRA wizard, which makes it extremely easy for people, right on the Internet, to transfer assets from their retirement plan into an IRA. Those are the kinds of things vendors are doing to make it easy for people who want to take that option."

The Principal Financial Group, which manages about $25 billion in retirement savings plan assets for more than 25,000 mostly small employers, says it also has seen little impact from the new tax laws thus far, at least as they pertain to plan portability. "Based on feedback from our Retirement Specialists, we have a very small participant base who have asked us about these provisions in the first six months (since they took effect)," says Principal spokeswoman Terri Shell. "Less than one percent of the participants who have called our Client Contact Center have asked about the EGTRRA provisions."

That jibes with the observations of Mary Kazan, director of benefits for Phillips-Van Heusen Corp. in Bridgewater, New Jersey. At that company, she says, "Employees were already allowed to roll 401(k) assets into another 401(k) (prior to EGTRRA), so for the most part we haven't seen much change. Kazan notes that employers in her industry typically don't hire many people who previously worked for the government or for non-profit organizations, so that the new portability benefits regarding 403(b) and 457 plans haven't had much impact at her company, either. Of those participants who do roll their money out of Phillips-Van Heusen's 401(k) plan, she says, about 75% roll their money into an IRA and about 25% into other employer's plans. The vast majority of those other plans are 401(k) plans, she adds.

Plan providers, plan sponsors, and plan consultants contacted by Stable Times all said they had no hard data on rollover activity attributable to EGTRRA, including any statistics that would indicate how plan participants are allocating their holdings among different asset classes. "The most recent data released by vendors is year-end 2001, which did not have this (legislation) in effect," says Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute. "You are not likely to have any idea until this time next year."

That said, The Principal's Shell notes that among its plan sponsor clients, "we can determine that for those who are taking advantage of the increased portability of their rollover dollars, they are increasingly rolling 403(b) and IRA funds into their 401(k) plans. We have seen instances of individuals rolling as many as 10 retirement plans into their 401(k)."

Plan sponsors themselves have been fairly quick to implement the rollover provisions enabled, but not required, by EGTRRA. "All of our plans currently allow rollover dollars into their plans," says Shell.

Ultimately, those provisions may get heavy use. It just hasn't happened yet.

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