Baby-Boom Retirees Want Advice On High-Balance IRA Rollovers

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As baby boomers prepare to retire and roll over their retirement plan accounts, asset managers prepare to attract them as clients.

“Targeting High Balance Rollovers,” a report by the Spectrem Group, Chicago, says asset managers will have about $2.7 trillion worth of retirement plan rollover money to work with over the next five years, when the first baby boomers turn 59 1/2.

Many producers are poised to serve these potential clients, largely because fewer than half of high-balance 401(k) participants say they have received rollover information from their plan, says Laurie Cochran, Spectrem director and author of the report.

“For nearly half of the individuals with balances over $100,000 who opted for a rollover, the advisor was the most important source of information in deciding what to do with the money,” Cochran says. “Among high balance rollover candidates who tapped an advisor for counsel on a rollover, only 8% reported having met the advisor through their retirement plan.”

According to the report, “The greatest opportunities for providers of investment services are in the high-balance rollovers. In 2000 for example, nearly 80% of the $400 billion that was eligible for rollovers was in accounts with balances over $50,000.”

Barbara Hume, vice president, Metropolitan Life Insurance Company, New York, agrees there will be a large market in Individual Retirement Account rollovers over the next five years. One of MetLifes priorities in targeting this market is “to focus on face-to-face support, not through the Internet,” Hume says. “Our field force goes out in a real commitment to building financial freedom for everyone.”

“We give information on tax changes, how to do direct rollovers, what the tax benefit is with Roth IRAs; we give life advice, tailored for people who need help investing their IRAs,” she says.

MetLife is working on several programs that target the baby boom retiree market. Among them is market analytics, a vehicle through which industry databases are reviewed for companies that could benefit from direct-mail programs and educational seminars for their soon-to-be retirees.

“We presently work with 87 of the Fortune 100 companies, and we tailor for them employee support solutions,” Hume says. “Lets say theyre downsizing and letting people go, a lot of them have large retirement programs. We tailor those.”

Another program used by MetLife is asset allocation modeling, designed to help employees who are eyeing retirement determine if their risk tolerance for investments is conservative, moderate, or aggressive.

“We look at fixed annuities, mutual funds, and then variable annuities as a third alternative for the IRA marketplace, so we walk them through to see what rollover is best for them,” Hume says.

Retirees who have many assets might want to consider the “stretch” or “legacy” IRA, another option MetLife helps with, Hume says. This investment vehicle allows retirees to stretch the benefit over their lifetimes or the lifetimes of their children, so it becomes a “legacy” they can leave to them, Hume says.

Dave Evans, vice president of Independent Insurance Agents of America Inc., Alexandria, Va., says an agent working in this market should keep up with changes in rollover tax law.

“In January the IRS promulgated new regulations on the minimum required distributions,” Evans says. “It provided more flexibility regarding taking distributions. It also allows people to take less out at 70 1/2 in most cases, and so thats good news.”

There are many software packages currently available that can help agents break down the tax laws involved in rollovers, says Evans.

In addition to keeping up with the changes in tax law and specifics of retirement asset management, agents can best serve their clients by keeping in mind the psychology of the retiree, Evans says.

“Even though it seems like a particular niche, there are broader issues people have to think about in looking at large rollovers,” Evans says. “It involves knowing their objectives, estate planning, whether they should take more or less out of the account.”

Agents should assess whether their clients have long-term care insurance and Medicare supplement coverage, or Medigap, Evans says.

“That would influence greatly their planning, because the assets could be more at risk if they havent provided for those contingencies,” Evans says.

After assessing estate planning and medical illness exposure, the psychology of the individual should be considered, Evans says.

“You have to really understand the contingency,” he says. “They want to be independent, they are risk-averse, even though they might be able to take a little more risk with investments. You have to really understand what the clients risk tolerance is about and then respond accordingly. Peace of mind is a real consideration.”

Baby boomers have seen failures, and can find the tax laws regarding rollovers complex, Evans says.

“Doing a rollover involves sensitivity. You need to give people a best-case, worst-case scenario. Youve got to see the forest for the trees in dealing with the client.”

Michael Bonevento, a senior financial adviser who works in the Wall Township, N.J., office of American Express Financial Advisors, agrees that sensitivity is crucial when working with a baby boom-age retiree.

His first consideration in evaluating and developing a baby boomers retirement portfolio is age. An advisor must understand and explain to the client the tax implications of taking money out of a qualified retirement plan (usually a 401(k) plan) before and after age 59 1/2, he says.

One opportunity to access money before 59 1/2 is through net unrealized appreciation. NUA allows individuals under 59 1/2 holding company stock in 401(k) plans to roll that stock into non-IRA accounts, without incurring the 10% penalty and income tax on the full amount. Instead, the individual incurs the 10% penalty and income tax on the cost basis, not on the full value of the stock. For example, if the value of the stock is $1 million, but the cost basis is $50,000, the individual only pays the 10% penalty and income tax on the $50,000 cost basis.

“I work with so many people who are baby boomers and these are people who are heavily weighted in company stock in their 401(k),” Bonevento says. “These individuals have done a wonderful job of accumulating assets for retirement, but the assets are difficult to access, so retirement may still be difficult.”

Taking substantial periodic payments is another way to take distributions before age 59 1/2 without incurring a penalty, Bonevento says; however, income tax is incurred and so are penalties if IRS guidelines are not met.

A calculation is done that indicates the monthly stream of income a client can take from an IRA to avoid the penalty.

“If you dont take what youre supposed to take, theres a penalty, if you take more, theres a penalty,” Bonevento says.

An advisor should also understand what the retiree needs the assets to do.

“Spend time exploring how that client defines retirement, what excites them, what strikes fear in them,” Bonevento says. “Then youre in a position to start developing a portfolio that will minimize the possibility of those fears becoming a reality for them.”

Bonevento advocates using multiple layers of diversification to help determine the types of investments most appropriate for the client.

He also looks at the main objectives a portfolio can strive to achieve, depending on what the clients primary concerns are. For some, interest and dividends are a primary concern and growth is secondary; for others, growth is the primary concern.

“Then I look at diversification by sector and industry,” Bonevento says. “In the late 1990s, people were weighted heavily in certain sectors and did well in an up market. However, the lack of diversification by sector and industry in the year 2000 resulted in above-average losses for many investors.”

Maintaining that diversified portfolio is also important, Bonevento says. When certain investments are performing significantly better than others, the temptation is to dump the ones that earn less and pour all the assets into the higher performers.

Its imperative to resist this temptation, Bonevento warns.

“It comes down to discipline,” he says. “If you build a good portfolio, youll do well in the good times, and youll hold up well in the bad times.”

Reviewing and fine-tuning a portfolio is expected, but making major changes to a portfolio built on the retirement needs of the client is not a well-advised move, Bonevento says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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