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Doing 401(k) rollovers right

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SAN DIEGO – Done with care, retirement plan advisors can pursue 401(k) rollover business without leaving themselves open to any more fiduciary liability than they already assume.

Whether advisors will be allowed to do so under the Department of Labor’s expected expansion of the fiduciary standard is the real question. The DOL is pushing for the new standard because it believes workers lose billions of their retirement savings each year because of conflicts of interest created by financial advisors’ reliance on commissions.

That dilemma was at the heart of one of the sessions Monday at the National Association of Plan Advisors annual 401(k) conference here, a presentation that comes at a time when rollovers represent a bigger-than-ever money-making opportunity for retirement advisors.

Today, most of America’s retirement savings are in IRAs. There’s $7.2 billion in IRAs, $5.3 trillion in plans like 401(k)s, and $3.1 trillion in pension plans, according to the DOL.

Investors are expected to transfer up to $380 billion from former employers’ 401(k) accounts into IRAs this year alone, according to Cogent Reports. 

Many plan advisors typically prefer to turn over investment work to the industry’s growing cadre of 3(38) managers. But with so many dollars flowing out of workplace plans, the potential to create more wealth for themselves has become increasingly tantalizing. And the competition is heating up, especially from the major financial services firms that have spent big dollars in recent months to advertise their IRA business. 

The marketing of IRAs, however, has long been a tricky business.

In 2005, the DOL issued an advisory opinion saying, essentially, that advisors could be in violation of the Employee Retirement Income Security Act whenever they use their fiduciary authority to “cause” a participant to take a plan distribution “coupled” with a recommendation to invest that money in a way that means more money for the advisor.

While it might have been meant to sooth anxious advisors, the advisory left a lot of people as nervous as ever.

A Government Accountability report claiming plan participants are often subjected to biased information when presented with rollover options has not helped matters.

Further roiling the rollover waters, a Bloomberg News investigation last year found participants in major 401(k) plans like Hewlett-Packard Co., United Parcel Service Inc. and AT&T complained that broker-dealer reps lured them into rolling 401(k) assets into unsuitable IRA investments.

More recently, the SEC said one of its priorities this year was to exam fee selection and reverse churning – sales practices related to IRA rollovers.

All of this is why advisors who take an “educate vs. direct” approach with participants are probably safest, according to the panelists at Monday’s NAPA session.

“You can, with the right care and procedural safeguards, help participants with these wealth events,” said the moderator, Jason Roberts, an ERISA lawyer and the CEO of the Pension Resource Institute, a retirement industry consultant.

“It’s not a per se prohibition,” he said.

Those “safeguards” include working with giants such as LPL Financial, an approach recommended by panelist Brady Dall, a senior VP at 401(k) Advisors Intermountain. 

LPL for years has “supported” thousands of advisors in this way.

Still, taking extra care, Dall said the advisors who work at his firm “make sure they (participants) bring it up first. … No one is pushing people into a product. And we have procedures in place that allow us to show we didn’t affect that rollover.”

Those “procedures” typically include written disclosures that clearly spell out all fees and other compensation that the advisor would receive in connection with a rollover.

Any advisor providing ongoing, individualized investment advice to plan participants faces the greatest fiduciary exposure. But as Roberts reminded everyone, there’s no ERISA prohibition.

See also:

New Roth 401(k) rollovers maximize after-tax contribution value

Why 401(k) investment choices don’t matter anymore