Retirement Plan Advisor, July 2009: Assessing the Rollover Market

Advisors should make more of an effort to tap this market

In the current context of economic recession and corporate layoffs, experts believe that more and more investors will be looking to roll over their employer sponsored retirement plans--401(k)s and others--into an individual retirement account (IRA). The rollover market represents huge potential for those in the advisory business, says Christy White, founder and principal of Cambridge, Massachusetts-based research firm Cogent Research, yet it's the large distributors, the Fidelitys, Schwabs, and Vanguards of this world, rather than independent advisors who tend to capture the upside of migratory dollars.

"You would expect that an advisor who has relationships with people and is talking regularly to them would be in a good position to capture rollover dollars, but surprisingly, investors seem to prefer going to a distributor like Fidelity for a rollover," White says. Companies like Fidelity and Vanguard do have large 401(k) platforms and have gone after rollover dollars with aggressive marketing strategies, she says, but some banks and full-service firms have not been doing such a great job at retaining 401(k) dollars and rolling them into IRAs, and advisors haven't been paying a lot of attention to the rollover market.

In a recent report entitled "Assets In Motion: The Rollover IRA & Retirement Income Market Opportunity," (based on a survey of 4,000 individuals with more than $100,000 in investable assets), Cogent found that one in three, or 32%, have assets currently sitting in former employer retirement plans like 401(k), 403(b), and 457 plans. Among investors holding dollars in former employer plans, four in 10, or 39%, say they are likely to roll these assets into an IRA within the next 12 months.

"The current economy has made people think about where their dollars are and how those dollars are performing," White says, "so it is a great time for advisors to think of these dollars. Advisors believe that there is not enough money in these plans, but there's about $200,000 on average sitting in a former plan, so advisors should be thinking about this."

Food for thought for advisors? Certainly, says Art Grant, founder and president of independent broker/dealer Cadaret Grant in Syracuse, New York. While there are many advisors for whom $200,000 would be small fry, there are others who would actually be willing to provide the necessary advice if that sum were rolled over into an IRA. However, because of existing regulation and the way in which regulators seem set to continue, most advisors have not been able to provide advice to 401(k) plans, Grant says, so they do not have the relationships to help clients roll over into IRAs.

"The Committee on Education and Labor approved in late June a bill called '401(k) Fair Disclosure and Pension Security Act,' which states that to be an advisor to a typical 401(k) plan, you have to be a registered investment advisor," Grant says. "This means that the average investment advisor doesn't want to provide advice to the typical 401(k) plan. Yes, advisors will be expensive and a broker will charge a commission for advice. But because regulation is so against the idea of a commission, what's happening is that companies are being pushed to get the lowest cost alternative."

Compensation questions aside, it's true that Fidelity, Vanguard, et al. do have the bulk of employee sponsored retirement accounts, and make for the natural choice when it comes to IRA rollovers. However, White believes that those advisors who do have clients with 401(k) plans should make a greater effort to tap into the rollover market, since they have an edge over the large distributors because of the face-to-face, rather than online or e-mail relationships they have with their clients. In a context where people are more and more concerned about what's happening to their dollars, this can go a long way.

"Fidelity etc. have done a good job of servicing the 401(k)s that people have and so people say they want to stick with this relationship," White says. "It all starts with getting a plan in the door, helping people feel valued, and helping them make an easy transition, so I think the entry point for an advisor should be 'Let's take an inventory of the dollars that you have to see if you are in a position to maximize their potential.'"

A large, diversified distributor can serve many functions at once, and has the ability to serve both direct investors as well as individual participants, says Melissa Nassar, a principal in Vanguard's financial advisor group. Yet Nassar believes that many advisors across the nation are working very hard to capture rollover dollars. "So the question is not who is under- or over-prepared, but do you really understand the type of investor you have and what makes sense to them?" she says. "Rolling over the dollars is easy; the hard part is making sure you know where your money is invested."

In the IRA rollover space, 80% of the assets are with very large firms, but advisors stand a good chance working with the 20% that is scattered in smaller and mid-size plans, Nassar says. To capture these funds, advisors should try to align themselves with very strong record keepers and make sure that they have good systems in place to get a holistic view of their clients' assets.

Advisors also stand a chance to help clients already in IRAs transfer to Roth IRAs in 2010, when the law changes. Advisors will be able to present their affluent clients with a win-win situation, White says, where they can not only roll over assets for greater choice and accessibility, but they can do this in a Roth wrapper, earning tax-free returns in the future once the conversion is made.

Many investors are opening traditional IRAs with the expectation that they will transfer to a Roth next year, Grant says. However, there's no telling yet what the tax rates will be in 2010 and 2011, and given the fact that unemployment continues to rise, many people could find themselves with lower income and thus in a different tax bracket next year. "Both these factors are unknowables, so people will have to make sure they have the answers before converting to a Roth," Grant says.

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