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3 Steps to Offering Fiduciary-Friendly Rollover Advice

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A recent paper by the Investment Company Institute, The Role of IRAs in U.S. Households’ Saving for Retirement, 2016, reaffirms the importance of the IRA rollover opportunity for financial advisors despite the uncertainty surrounding the Department of Labor’s Conflict of Interest Rule. The paper indicates that more than half of traditional IRA-owning households contained rollovers from employer-sponsored retirement plans, and among these households, 82% indicated they had rolled over the entire balance.

Even more telling is that the majority of individuals (60%) consulted a professional financial advisor regarding their rollover, and for 50% of individuals, a financial advisor was their primary source of information. The top three reasons for electing a rollover were:

  • Did not want to leave assets with the former employer (64%)
  • Wanted to preserve tax treatment of the savings (63%)
  • Wanted more investment options (58%)

As Washington attempts to sort out its regulatory agenda, financial advisors can proactively take steps today to help make the most of the rollover opportunity while also positioning their practice for potential changes in the future. These three steps include refining your value proposition, preparing to answer tough (but fair) questions and putting the clients’ interests first. 

Refine Your Value Proposition

A value proposition should answer three questions: What do clients want when hiring you for help with their rollover; what do you provide rollover clients; and how are you different from other available options when it comes to rollovers. To help get started, here is an example:

“Most of our clients hired us because they were looking for peace of mind, that they will be able to meet their expenses in retirement. We start with a thorough financial planning exercise that, when completed, provides clarity for our clients about their financial future. We also take time to really know our clients. We recognize their voices on the phone when they call, are familiar with their family situations and even know their favorite restaurants and places to vacation. This deeper understanding is important because it helps us align our investment work with the sort of lifestyles our clients want in retirement.”

There is no right or wrong way to approach this exercise, and over time, most advisors’ value propositions change. The most important element in our view is that the value proposition resonates with clients, piques their interests and invites them to ask for more information.

Prepare to Answer Tough (but Fair) Questions

Advisors should be prepared to answer questions likely to be posed by rollover-eligible clients and prospects. Here is an example:

A client asks, “My employer told me I can leave my money in the 401(k) plan for as long as I like. If that is the case, why would I need an IRA rollover?”

One possible answer may be: “Your employer is correct, you may leave all or part of your 401(k) in the plan for as long as you would like. Many of our clients, however, chose to roll over their balances into an IRA because we are able to collaborate on an individualized investment strategy that takes into account whatever plans they have during retirement. Once I learn more about your particular situation, we can review the potential advantages and disadvantages for all your options.”

Advisors should also be prepared to answer questions about fees associated with IRA rollovers and how these fees compare to those charges in a client or prospect’s employer plan.

The pending DOL fiduciary rule, which could be delayed or withdrawn, would consider any advisor recommendation to roll over 401(k) assets into an IRA as fiduciary advice, and that, in turn, would require advisors to document at minimum the reasons behind the recommendation.

Put the Client’s Interests First

Although many already do so, it’s important to remember that financial advisors must be able to fairly assess participant distribution options and, in certain circumstances, recommend that the participant not elect a rollover. Consider the following scenario:

Tom Jones, age 56, separated from service earlier this year. He currently has a $780,000 401(k) balance, diversified across several asset classes. In addition, his spouse will receive a pension at her retirement in five years, and the couple has $60,000 in after-tax savings. You learn that Tom wants approximately $100,000 immediately to take a long-awaited trip to Europe and to remodel the house. He does not anticipate needing any additional money in the near future, as his wife’s salary will cover household expenses.”

In this case, it would not be advisable to roll over Tom’s entire balance. The reason is that although distributions from his current 401(k) plan will not be subject to the 10% premature distribution penalty since he separated from service after age 55, any distribution from an IRA is subject to a 10% penalty until age 59½, unless an exception applies. Since Tom has a short-term liquidity need, he should keep the necessary amount in his employer’s plan.

Many plans will allow Tom to roll over part of his balance now, leaving a balance behind for future withdrawals. Advisors who recommend Tom roll the full amount either are not putting his interests ahead of their own, or are simply providing poor financial planning advice. 

At this point, whether the Conflict of Interest Rule is maintained, revised or eliminated after the 60-day delay remains anyone’s guess. One thing is certain, however: The need for a financial professional who can help lump-sum recipients, such as Tom in the scenario above, make the most of their opportunities will not disappear any time soon.


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