When moving on to a new job, people often leave their 401(k) retirement plan assets behind. So rolling those assets over into an IRA account makes total sense, right?
Not so fast.
There are plenty of reasons why advisors should pause before telling their clients to make the 401(k)-to-IRA move — and one of those reasons is the potential for a conflict of interest and regulatory consequences, according to experts.
“Regulators are not viewing rollovers favorably right now. The issue isn’t when to roll over, it’s when not to roll over,” said Scott Hanson, senior partner at Hanson McClain Advisors, headquartered in Sacramento, California.
Regulators on the alert
Both the Financial Industry Regulatory Authority and the Securities and Exchange Commission say advisors need a good reason to roll over because clients will usually have to pay higher fees in an IRA than in a 401(k), Hanson said. While Hanson McClain has done plenty of rollovers, he added, the firm is clear in telling clients about the pros and cons involved in moving retirement assets.
“Advisors better have good reason to roll over the 401(k) other than to generate fees and commissions for themselves,” Hanson said. “That issue exists even for the most ethical fee-based advisor. You have to be very clear and document the reasons why you’ve recommended an IRA rollover. It all comes down to documenting.”
Still, advisors have a definite advantage when advising clients about rollovers. According to Cerulli Associates research data gathered in 2013, advisors manage 70 percent of rollover assets, and 83 percent of the rollover assets that advisors manage have come from their existing clients.
Hanson points to several situations where it might be a bad idea for advisors to suggest a rollover:
The client is between the ages of 55 and 59 ½. The usual age for allowed retirement plan withdrawals is 59 ½, but a worker who’s at least 55 and leaving a job can tap money from that job’s 401(k) without early withdrawal penalties. However, if those retirement funds are transferred to an IRA, this age rule no longer applies.
The 401(k) includes a large portion of company stock. The tax advantages of net unrealized appreciation can be lost if the stock is rolled into an IRA rather than sent directly to a brokerage account.
The 401(k) plan offers adequate investments. Some companies’ retirement plans offer good investment options with relatively low-cost institutional pricing that may be lower than the fees in a similarly constructed IRA portfolio.
Similarly, a “Should You Roll Your 401(k) into an IRA?” retirement report from BlackRock notes that 401(k) investors might pay lower management fees and enjoy access to lower-fee share classes of funds than individuals typically get on their own.
“Employers may also provide low-cost or free guidance to help you learn about investing for retirement. But this is not always the case, so it’s important to review the fees and expenses of your available 401(k) plan and then compare them with the fees and expenses of any IRAs you are considering before making a decision,” the BlackRock report reminds investors.
The cost of doing business
Ultimately, many people do end up rolling over assets from a 401(k) or a 403(b) into an IRA. In fact, FINRA cites Employee Benefit Research Institute data showing that such rollovers comprise the largest source of contributions to the IRA universe.
But buyer beware: FINRA’s investor alert “The IRA Rollover: 10 Tips to Making a Sound Decision,” published Jan. 23, 2014, offers a primer to investors on what they need to consider before seeking help from a financial professional. And a number of FINRA’s tips point to fees charged by advisors and potential conflicts of interest.
“Be wary of ‘Free’ or ‘No Fee’ claims,” FINRA warns investors. “Competition among financial firms for IRA business is strong, and advertising about rollovers and IRA-related services is common. In some cases, the advertising can be misleading.”
Even if there are no costs associated with the initial rollover, FINRA notes, investors should watch for costs related to account administration and investment management.
Further, FINRA states that investors should realize that conflicts of interest exist.
“Financial professionals who recommend an IRA rollover might earn commissions or other fees as a result. In contrast, leaving assets in your old employer’s plan or rolling the assets to a plan sponsored by your new employer likely results in little or no compensation for a financial professional,” according to the investor alert.