3 Steps to Offering Fiduciary-Friendly Rollover Advice

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The pending DOL fiduciary rule, which could be delayed or withdrawn, would consider any advisor recommendation to roll over 401(k) assets into an IRA as fiduciary advice, and that, in turn, would require advisors to document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