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Regulation and Compliance > Federal Regulation > FINRA

Regulators shine spotlight on IRA rollover suitability

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Threats of heightened regulatory scrutiny have loomed large in the first weeks of 2014, and perhaps no area has received greater attention than the IRA rollover transaction. Both the SEC and FINRA have issued warnings to advisors who provide guidance to clients looking to roll traditional workplace 401(k) accounts into private IRAs, and this focus on the importance of proper guidance should be keeping all advisors on their toes. For many advisors, this means a new course in IRA rollover compliance is called for, as even the most experienced professionals may find themselves in the dark over the new requirements being ushered in by the industry’s most prominent regulators.

Heightened investor protections

The primary focus of the guidance issued by FINRA and the SEC centers on investor protections, and proper disclosure and suitability are high on the list for 2014. Importantly, the FINRA guidance identifies four potential options that may be available to 401(k) plan participants, including (1) leaving the funds in the 401(k), (2) rolling the funds over into a new employer’s 401(k), (3) an IRA rollover, or (4) cashing out the account.

The emphasis being placed on the existence of these options highlights how critical it is for advisors to avoid placing undue emphasis on the rollover transaction, as any one of these four options might represent the most appropriate action for any given client.

On the disclosure front, a new weight will be placed on the information contained in any marketing materials used by advisors, who now must avoid presenting the IRA rollover option as the only rational choice for clients. Further, advisors must tread carefully when it comes to fee disclosure to ensure that clients fully understand any additional fees or expenses that can be associated with the IRA rollover option.

Suitability, while always a principal consideration, becomes even more important in today’s heightened regulatory environment as many advisors may be called upon to demonstrate exactly why the IRA rollover benefits the individual client.

Should your clients rollover?

Despite all of the focus on suitability, there are actually many reasons why a client would still benefit from an IRA rollover. Importantly, an IRA can provide the client with added flexibility when it comes to withdrawal rates, as many 401(k)s require that funds be withdrawn at a fixed rate or in a lump sum.

In the same vein, IRAs often offer clients increased flexibility in their investment options—a consideration that may be particularly important to clients with significant funds locked into tax-preferred vehicles, such as life insurance or annuities, which may or may not provide them with potentially desirable investment discretion.

Despite this, there are advantages to leaving funds in a 401(k)—for example, the required minimum distributions that an IRA owner must begin taking at 70½ are generally not required of 401(k) owners who continue working, and the fees and expenses associated with managing an IRA can be higher than in the context of an employer-sponsored 401(k).


The bottom line is that the IRA rollover, like any other financial move, must be examined in light of the individual client’s needs. While providing fair and thorough disclosure should always be important, the warnings issued in the last few weeks indicate that it’s more crucial than ever for advisors to document the steps they have taken to ensure that their clients receive the advice necessary to make informed decisions regarding any potential IRA rollover transaction.


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