Short version: Regarding H.R. 10467: Simplify the 402f notice of 401k distribution options. The notice could be 6 lines maximum instead of 9 pages. I question the bill's provision to allow employees 50+ years old to rollover existing plan balances into annuities.
Long version: I applaud the direction H.R. 10467 proposes in simplifying the 402f notice of 401k distribution options. With 35 years of industry experience under my belt, I now oversee a fair number of retirement plans. When an employee leaves, HR will sometimes email to alert me to that fact. It is part of the personal touch that I provide.
I will look up the employee's balance and whether it is pre-tax, Roth, or both. I will then send a simple email with their options. The entire email including opening salutation, the four distribution options, and closing greeting is 6 sentences long. Why does the 402F distribution notice need to be 9 pages long (as I saw in an example from the Minnesota State Retirement System)?
Why is a fuss being raised about 401k distributions? According to a new Government Accountability Office (GAO) report, only a third of plan participants receive important notice that could help them make a decision about their retirement savings. I am curious how many of those 1/3rd actually understand the notice! Further to the point, per the report, 80% of participants are not aware of the four distribution options.
Even worse, 40% of participants did not realize the tax consequences of cashing out their 401k. The consequences include a 20% upfront Federal tax withholding. When the participant files their taxes, they will face possible state taxes along with Federal and state early withdrawal penalties. In one case, I saw a person's total distribution decreased by nearly 40% in taxes and penalties.
Shortening the 402f notice (and giving to all terminated employees!) is paramount. I found myself thinking about an old adage about resumes from my early days in Corporate America. A one-page resume will be read. Two-pages may be read. And a three-pager will likely go in the recycle bin. Yes, that is applicable in Corporate America but not other arenas (ie, academia). The point is a nine-page disclosure likely won't be understood let alone read. Inaction can then result.
The second part of H.R. 10467 wants to allow current employees who are 50 or older to rollover existing 401k balances into annuities. My antennae goes up when I read that. A natural first question, based on "Follow the money", is, "Who stands to benefit from this?". If I were truly inquisitive, I would look at the two House of Representatives sponsors of the bill and see how much PAC money they might have received from the insurance industry as annuities typically are offered by insurance companies.
Annuities can be right in certain situations but I am concerned that this type of provision could lead to inappropriate offering of an investment that is complex and not right for everyone. Again, dipping back into my early career, I worked in an office where the top producer sold every client the same annuity. I was the new guy in the office but I couldn't help wonder about that practice.
I am concerned about the possible predatory behavior this provision could allow to be unleashed. Yes, this is only a bill and thus a long way from becoming law. Still, this is a bit worrisome and worth keeping an eye on.
The Parting Glass (or a final thought!)
Perhaps I can suggest that each disclosure/ memo/ email more than four paragraphs long should be come with a short two sentence summary? Now that might be worthwhile.