Robin Diamonte knew that something had to be done. After joining United Technologies Corp., a manufacturer for the aerospace and building industries, as CIO in 2004, Diamonte set out to improve the company’s defined benefit plan. When the global financial crisis of 2008–’09 sapped employees’ retirement saving plans by 30 percent, she turned her attention to making Farmington, Connecticut–based UTC’s defined contribution offering as close to a defined benefit pension as possible. Her changes to the 401(k) plan included a lifetime income feature, automatic contribution increases of up to 10 percent and the lowest fees in corporate America.
But Diamonte grew tired of watching retiring and separating plan participants become fodder for call centers trolling to open new IRA accounts. To counter this pressure, she and her peers at International Paper Co. and IBM Corp. have launched campaigns to inform employees of their choices when it comes to their 401(k) accounts.
For Diamonte it began several years ago, when UTC offered employees a voluntary early retirement program. She was alarmed to see a billboard on Interstate 95 near company headquarters advising staff to close their UTC retirement plans and move the money to an IRA sponsored by a local brokerage. “We said, ‘This is crazy; we have to do something about this,’” Diamonte recalls.
In response to the billboard, a UTC attorney fired off an e-mail to the brokerage that effectively said, “We don’t think the Department of Labor would like this.” The brokerage took down the highway ad, but scattershot fixes won’t stop such vendors from trying to persuade defined-contribution-plan participants that IRA rollovers are the best way to manage their retirement assets.
Late last year UTC began giving departing employees a brochure with the headline, “You’re leaving United Technologies. But your money in the UTC Savings Plan doesn’t have to.” The brochure outlines four choices: Keep your money where it is (retaining the customized mix of low-cost investment options); roll it over to a qualified plan of a new employer; roll it over to an IRA; or withdraw the money.
Diamonte faces an uphill battle. As U.S. defined contribution assets have grown to trillions of dollars, brokerages and mutual fund firms big and small have responded with aggressive efforts to vacuum up the 401(k) assets of separating and retiring employees. Television commercials advising viewers to leave their “old 401(k)” and move their money into an IRA account are ubiquitous.
“That’s what’s alarming to me,” says Robert Hunkeler, vice president of investments at Memphis, Tennessee–based International Paper, referring to the large number of IRA rollovers. “People are rolling out of the protected 401(k) environment to an unprotected retirement plan.”
The protection that Hunkeler cites is the fiduciary status of a corporate retirement plan sponsor like International Paper. As many private sector defined benefit plans were shuttered in the 2000s, Hunkeler and his peers at other large U.S. companies spent years crafting superior defined contribution plans to make up for the loss of a pension.
But the advantages of these plans can disappear when investors switch to a more expensive IRA account. With a value of $7.3 trillion at the end of 2015, IRA assets outweighed defined contribution plans’ $6.7 trillion (out of a total $24 trillion in U.S. retirement assets), according to the Investment Company Institute, a Washington-based trade association.
“People who keep their money in the [International Paper] plan are a distinct minority,” says Hunkeler, who last year enlisted the aid of a behavioral economist to write a letter urging employees to stay in the company 401(k). Eighty percent of retirees have taken their assets elsewhere; he wants to see 80 percent stay.
The Department of Labor’s new fiduciary rule, which compels retirement plan vendors to act in a fiduciary capacity rather than push people to invest in something that isn’t in their best interest, could help to tip the balance. “As we see the industry change with the new DoL fiduciary regulation, we expect there will be more education on rollovers and comparison of your current plan relative to other employers or rolling into an IRA,” says Sabrina Bailey, global head of defined contribution at Northern Trust Asset Management in Chicago.
The DoL rule was passed this April, partly thanks to a 2013 report by the U.S. Government Accountability Office (GAO) showing that the rollover process favors distributions to IRAs. Another finding: Labor regulations don’t ensure that 401(k) plans provide complete and timely information to participants on all of their distribution options. Hunkeler, Diamonte and Raymond Kanner, IBM’s newly departed CIO, aim to address this shortcoming with their educational campaigns.
The most worrisome finding in the GAO report was exposed by undercover work. Pretending to be separating employees, agency staff phoned retirement plan providers. Through recorded conversations published on the GAO website, staff learned that “plan participants are often subject to biased information and aggressive marketing of IRAs when seeking assistance and information regarding what to do with their 401(k) plans.”
Some 401(k) plan participants already know when it’s best to stick with their former employer’s offering. One of them is Charles Van Vleet, who left UTC in 2013 to head the investment office of Providence, Rhode Island–based industrial manufacturer Textron as CIO and assistant treasurer. UTC’s well-designed, low-cost lifetime income retirement plan feature has helped motivate Van Vleet to keep his nest egg in Farmington.
As an investment professional, he knows more than the average employee about how to manage retirement assets. The big question for Diamonte, Hunkeler and Kanner: How long will it take for others to catch on?
