Qualified Plan Rollovers: The Next Frontier

Only 52% rolled the money into an IRA, and just 6% moved it into the new employers plan, Hewitt says.

That 42% figure is “shocking” and “disturbing,” says Tom Simpson, national sales manager for Ameritas Variable Life Insurance Company, Lincoln, Neb. It is especially so because that figure includes older workers (in their 40s and 50s) as well as a lot of young people, he says.

Those who are advising departing employees may not be asking the important questionssuch as who will spend the moneyor providing suitable education, Simpson suggests.

Also, when considering products in which to place the rollover funds, some employees and advisors are not aware of how rollover products have been changing in recent years.

For example, some people will not consider rolling their money into an IRA with a variable annuity due to perceptions that may be inaccurate, he indicates. These perceptions include the belief that rollover VAs have high fees, redundant tax deferral, and insufficient disclosure on fees and features.

The tax deferral is redundant, he conceded, but newer designs are coming out that have lower fees and a pay-by-the-feature-selected structure.

Ameritas, for example, offers a VA suited to the IRA the rollover market with an average expense of 156 basis points a year (including fund expenses), says Simpson. “This competes with no-load mutual funds and is still tax deferred,” he contends. There is full disclosure on this, he adds, and the VAs modular structure enables clients to pay for the surrender charge option they want.

Advisors who enter the rollover market “need to know that the paradigms in products are changing,” he concludes. With the new designs, “sometimes the VA is the appropriate tool to use.”

Product suggestions for this market vary widely, says Robles. “For instance, you can use mutual funds, annuities, hedge funds, private accounts, separately managed accounts, bond and bond funds, and individual stocks.” Also consider how single-premium immediate annuities, reverse mortgages and long term care insurance might fit in, he says. “And dont forget that the client has Social Security coming in. Thats guaranteed money.”

But first, “be sure you understand the full picture,” he adds. “You need to know what is best for the client.”

“You almost have to have a degree in therapy, to become a great advisor in this market,” quips Klein. “You need to focus on managing the relationship, not the money.”

As for the plan details, the skilled advisor needs to become educated on tax and estate planning issues that can complicate rollovers, says Klein.

They also need to be aware of the differences between using mutual funds and annuities for rollover IRAs, say experts. “About 70% of our rollover business is in IRAs with mutual funds and 30% in IRAs with annuities,” notes Richard Ford, senior vice president-marketing and sales development at Plan Member Securities Corp., Carpenteria, Calif.

Many of his firms clients are people who are price sensitive and relatively investment savvy, and they opt for plans with lower costs. “That usually means using mutual fundsand downsizing the risk of the portfolio as the person ages,” Ford says.

But some clients are looking for a stable retirement income, Ford adds, and they want assurance. “So we offer them annuities.” These are good options, especially today, he says, because “many insurance companies have become creative in the rider benefits they offer, sometimes offering life, growth and income protection all in one rider.”

One annuity product in particularthe equity index annuity with a built-in high water markcan be effective for certain older clients, says Russell. “If the person passes away, the beneficiary gets the high water mark amount, even if the account value is down at time of death,” he explains.

There are costs for this, but Russell says when he spells them out, clients who want guarantees are receptive. But he cautions that if a client might need to access the money via early withdrawal, the EIA may not be appropriate due to the costs involved.

Klein prefers to use market investments for rollovers rather than annuities. Most of his clients resist the income feature of annuities “because there will be nothing left when they die,” he says. And they dont like paying the fees for features they may not use.

So, Klein will often use bonds and preferred stock as the safe money options inside a rollover IRA. And he uses other investments as fit the client profile.

Russell looks for investments that are not tax efficient. This might be taxable bonds, mutual fund that throw off huge capital gains or even real estate investment trusts. Inside the rollover IRA, all the gains are tax deferred, he explains, so “the money grows quicker and we get better returns.” Then, as the client ages, he switches to more conservative options.

“Remember,” says Robles, the rollover IRA may not always be the best option. For instance, if the person stays in the old 401(k) or elects to roll the money into the new 401(k), the person gets the advantage of the 401(k)s creditor protection.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 5, 2003. Copyright 2003 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.