Enhancing Understanding of 401(k) Distribution Options: Insights from GAO’s Latest Report

In a recent report published on May 22, 2024, the Government Accountability Office (GAO) underscored the need for improved understanding among 401(k) participants regarding their distribution options and the associated tax implications. The report, titled “401(k) Retirement Plan Tax Notices: Federal Actions Can Help Participants Understand Their Distribution Options,” responds to Section 336 of the SECURE 2.0 Act of 2022, mandating the U.S. Comptroller General to evaluate the effectiveness of 402(f) Notices and provide recommendations for enhancing participant comprehension.

The 402(f) notice is sent to individuals receiving a plan payment that, unless there is an election, the payment will automatically be rolled over to an IRA (and identifying the trustee or issuer of the IRA).

Background and Purpose of the Report

The primary focus of the GAO report is to address the challenges faced by 401(k) participants in understanding their distribution options as outlined in the 402(f) Notice, also known as the “Special Tax Notice.” These notices are required by plan administrators to inform participants about eligible rollover distribution rules and the tax consequences before a distribution is made. Despite the availability of IRS model notices, comprehension remains low among participants.

The GAO’s May 2024 report builds upon findings from an earlier January 2024 report, which identified significant gaps in participant awareness and understanding of their 401(k) distribution options. The new report reiterates the need for federal agencies like the Treasury Department, the Internal Revenue Service (IRS), and the Department of Labor (DOL) to take proactive steps to improve the clarity and timing of these notices.

Key Findings on Participant Understanding

  1. Lack of Knowledge Regarding Distribution Options:

The survey highlighted in the January 2024 report revealed that 82% of 401(k) participants eligible for a plan-to-plan rollover were unaware of all four distribution options. Over half of the participants were not informed that they could leave their savings in their former employer’s plan.

  1. Misunderstanding of Tax Consequences:

Around 40% of surveyed participants did not fully understand the tax implications of their distribution choices, despite these being outlined in the 402(f) Notice.

  1. Timing Issues with 402(f) Notice Delivery:

The survey found that about one-third of participants received unsolicited written information from their old plan (assumed to be the 402(f) Notice) before making a decision about their 401(k) savings, while 15% received it after making a decision. This indicates a need for timely dissemination of the 402(f) Notice to better inform participant decisions.

Importance of Retaining Savings in Old Plans

The GAO’s May 2024 report references a March 2013 report that highlighted the benefits.of leaving savings in an old 401(k) plan, such as maintaining tax-deferred status and potentially incurring lower administrative and investment fees compared to a retail IRA. The report also cites industry experts who argue that clearer, more concise information about the tax consequences of each distribution option is necessary, as the current 402(f) Notices are too complex for most participants to understand.

Recommendations and Federal Agency Responses

While the May 2024 report does not introduce new recommendations, it emphasizes the implementation of recommendations from the January 2024 report to mitigate the challenges associated with 402(f) Notices.

  1. Recommendations to the Treasury Department:

The January 2024 report recommended that the Treasury Department take actions such as:

– Amending the 402(f) Notice requirements and Model Notice.

– Including clear information about the option to leave savings in the old plan.

– Providing more concise information on the four distribution options and their tax consequences.

– Addressing the timing requirements for delivering the 402(f) Notice to ensure participants receive it upon job separation.

The May 2024 report reiterates that by implementing these recommendations, the Treasury Department can help participants receive comprehensive information about their distribution options. The Treasury Department has acknowledged the need to update the 402(f) Notice but cited challenges due to statutory content requirements. The GAO suggests seeking statutory authority from Congress to address the timing issue.

  1. Recommendations to the Department of Labor:

The January 2024 report also made several recommendations to the DOL, including:

– Issuing a Request for Information (RFI) to explore encouraging secure electronic data standards for processing plan-to-plan rollovers.

– Ensuring participants receive clear and understandable information about all distribution options and their tax consequences upon leaving their job.

The DOL responded that it would consider these recommendations as part of joint-agency efforts to review disclosure requirements. The May 2024 report notes that DOL has not yet acted on a 2015 recommendation to explore a joint-agency effort to update the 402(f) Notice. However, the DOL has indicated ongoing projects to enhance disclosures to separating participants and is engaged in efforts to review all participant and beneficiary disclosures, including the 402(f) Notice.

Implications for Spousal Rights

Enhancing the information in the 402(f) Notice can also benefit spouses and former spouses of 401(k) participants. If they receive a payment from a plan under a qualified domestic relations order (QDRO), they generally have the same options and tax treatment as the original participant. Therefore, improvements to the Notice would aid them in making informed decisions.


The GAO’s May 2024 report highlights persistent challenges in participant understanding of 401(k) distribution options despite the mandatory 402(f) Notices. By reiterating and advocating for the implementation of recommendations from the January 2024 report, the GAO underscores the importance of clear, concise, and timely information for participants making critical decisions about their retirement savings.

Federal agencies like the Treasury Department and the Department of Labor play crucial roles in addressing these challenges. Their commitment to enhancing the clarity and delivery of 402(f) Notices will significantly impact participants’ ability to make informed decisions, ultimately leading to better retirement outcomes. As the GAO continues to monitor and report on these issues, it remains imperative for these agencies to take actionable steps towards improving participant understanding and utilization of their 401(k) distribution options.

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