The qualified plan rollover market is hardly new. For example, Larry Klein, a registered investment advisor, says rollovers have represented 40% to 50% of his business since the late 1980s.
But rollovers are definitely cutting edge, where business opportunity is concerned, say experts. Therefore, they say, financial advisors and companies should be taking steps to enter this market now, if they have not already done so.
“Its a huge and growing market for advisors,” contends Klein, who is president of NF Communications Inc., Walnut Creek, Calif.
More and more baby boomers will be hitting retirement age in the next 5 to 10 years, he explains. In addition, due to the new work patterns and economic pressure, more people are changing jobs and/or dealing with layoffs, so they need to decide where to put the money from their former retirement plan.
This money includes assets in 401(k), 403(b), 457 and other defined contribution programs at the employer.
Some financial executives have told National Underwriter that rollovers already are counting for increased sales. The large majority of sales are said to be in individual retirement accounts containing mutual funds and other investments. However, some sources report that 20% to 30% or more of their rollover sales are going into IRA annuities (fixed or variable annuities inside an IRA wrapper).
Rollovers accounted for about $188 billion in assets in 2002, according to Financial Research Corp., Boston (see related article on page 5).
Not all players contacted by NU are seeing rollover sales blossom, but most expect the rollover IRA market will open wide, and soon.
Rollovers are “perfect for people who want to leverage their qualified plan money as tax efficiently as possible,” explains Angelo J. Robles, president, Northeast Wealth Advisors, Stamford, Conn.
The problem right now, he says, is that “I dont think average clients or advisors are yet knowledgeable about the products or how the products can help meet client needs.”
Another problem, he says, is that some advisors believe a brisk rollover market is too far off to prepare for now. “There is some truth to that,” he agrees, noting that most boomers will not start retiring for a few years and that some are even delaying retirement.
However, says Robles, this is the time for advisors to start helping clients understand their retirement needs and how they will handle their rollover accounts. “The advisor needs to show clients how to get what they want, so their customers dont have to work longer or reduce their expenses” in order to get by.
The advisor also needs to start focusing on building client relationships, learning clients emotional buttons and talking with clients about how to prepare for long term care expenses, he says.
Finally, Robles says, advisors need to become educated now on rollover products so they help clients who change jobs choose the best option regarding their existing 401(k). “The average worker today will have at least 7 job changes,” he notes.
Thats important to keep in mind, say experts, because clients often blame the advisor for not informing them about the issues involved.
People often do not understand the tax issues or the importance of tax deferral, explains James G. Russell. He is vice president-qualified plan and tax reduction service at Filomeno & Company, a CPA and business advisory firm in West Hartford, Conn.
They may not realize, for instance, that “if they take the money as a lump sum (rather than rolling it over), the employer will withhold 20% to cover the taxes due. Then, if they decide they want to have all their money continue growing in a rollover IRA, they will have to find a way to come up with the 20% to make up for the shortfall.
“Many also dont know about the additional tax they will have to pay if they take their money before age 59.5. Or, they think that their financial distress is a reason for an exception, when it is not.”
When clients later learn these things, “they become upset–not at their former employer but at their advisor,” continues Russell. “They say, No one told me about this.”
His advice? Be sure to tell clients about these things, “and when you do, always have it in writing, that you did provide this information.”
These education efforts may be coming none too soon. A recent report from Hewitt Associates, Lincolnshire, Ill., shows that nearly half–or 42%–of 160,000 employees who took 401(k) distributions in 2002 cashed out their 401(k) plans when they changed jobs.