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Retirement Planning > Saving for Retirement > IRAs

401(k) Income Solutions Threaten IRA Rollovers

By John Manganaro

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What You Need to Know

  • Legislative changes and regulatory updates have made in-plan annuities more attractive to retirement plan sponsors and participants.
  • As a result, the steady flow of retirement dollars out of 401(k) plans and into individual retirement accounts could slow.
  • At the very least, more careful analysis and documentation of the IRA rollover process will be demanded of wealth professionals.

The rapid development of retirement income solutions specifically tailored for use within 401(k) plans is set to raise new challenges for wealth management professionals who rely strongly on rollovers to grow their books.

Don MacQuattie, leader of Raymond James’ institutional and retirement business, says many financial planners are aware of the rapid emergence of new “in-plan” income solutions in the wake of the passage of the Secure Act in 2019. However, in his experience, many advisor professionals falsely believe the in-plan income market still remains in its nascent stages, and that a full and sophisticated product set remains years or even decades away.

“In my opinion, we are just one or two years away from a product environment that will change the discussion about whether it is better for the typical retiree to roll their money out of the 401(k) plan in order to access flexible income solutions,” MacQuattie recently told ThinkAdvisor.

According to MacQuattie, wealth management professionals who do not serve retirement plans tend to assume this development won’t have much of an impact on their work.

“That’s a risky point of view,” he warns. “As 401(k) plans become more compelling retirement income vehicles, you are going to need to be able to make a more compelling case that any given rollover is truly in the client’s best interest. Frankly, there has never been a better time to have your retirement dollars in a 401(k) plan. The costs can be driven so low and the fiduciary protections carry a lot of weight.”

Ultimately, MacQuattie warns, the steady flow of retirement dollars out of 401(k) plans and into individual retirement accounts could slow in the years ahead, and by a more substantial degree than many wealth management professionals might assume. The impact on a wealth manager’s book of business could eventually be profound, he says, especially if firms aren’t able to improve their IRA offerings with respect to pricing and service quality.

How the Secure Act Changed the Game

Prior to the enactment of the Secure Act, plan sponsors rarely offered annuities or other retirement income solutions within their 401(k). Though they were allowed to provide participants with these lifetime income options, MacQuattie explains, many plan sponsors were reluctant to take on more fiduciary responsibility than they already had.

Mainly, employers were worried that they could be held liable if the annuity carrier became unable to satisfy their financial obligations under the contract at some point in the future. As MacQuattie recalls, the Secure Act alleviated much of this concern by creating a specific fiduciary safe harbor for selecting the annuity provider.

In the new regulatory environment, plan sponsors can now satisfy their fiduciary obligations in choosing the annuity provider by conducting an objective, thorough and analytical search at the outset to evaluate annuity providers. If the plan sponsor completes a prudent, loyal and well-documented provider selection process, they are protected from liability should insurance carrier solvency issues arise in the future, however unlikely that may be.

Growing Plan Sponsor Interest

Research from TIAA and other organizations shows that employers are paying attention to this shift, with nearly nine in 10 defined contribution plan sponsors who do not today offer in-plan guaranteed lifetime income annuities being at least somewhat interested in offering them in the near future. Other data shows three in four plan sponsors are extremely or very interested in offering a target date fund that allocates a portion of participant assets to lifetime income.

MacQuattie says more employers than ever understand that it has become essential for 401(k) plans to offer sources of guaranteed lifetime income, such as annuities. Such products not only supplement lifetime income from Social Security, but they also help to replace lifetime income that would traditionally have been provided through a pension plan.

What It All Means for Wealth Advisors

According to MacQuattie, the emerging environment will not entirely eliminate consumer interest in IRA rollovers, as almost any IRA is still going to be more flexible than almost any 401(k) as a retirement income vehicle.

“That’s pretty safe to say, but it’s not the only factor at play here,” MacQuattie says. “There are also issues of costs and fiduciary protections to consider. If and when 401(k) plans achieve a level of income flexibility that begins to approach what is available in IRAs, it does raise questions about whether a given rollover into a higher-cost solution makes sense.”

Another factor at play is the tightening best-interest standards under which advisory professionals must operate. Of specific importance, MacQuattie says, is the interrelated enforcement of the SEC’s Regulation Best Interest, the Department of Labor’s new interpretation of the fiduciary rule under the Investment Advisors Act, and a recently finalized prohibited transaction exemption by the Department of Labor, referred to as PTE 2020-02.

With these regulatory elements in place, any recommendation regarding a rollover given to a retirement plan participant must be made in that client’s best interest. Several factors must be considered and documented in this analysis, including the alternatives to the rollover, the fees and expenses associated with the accounts, whether administrative expenses are covered, and the different levels of services and investments available.

Advisors must also expressly weigh the long-term impact of any increased costs, why the rollover is appropriate despite any additional costs, and the impact of “economically significant investment features.”

In the end, MacQuattie says, any given rollover recommendation must now clear a substantially higher regulatory bar, and the wealth management and insurance brokerage communities are destined to lose clients and assets if they do not address this dynamic.

(Photo: Shutterstock) 

John Manganaro

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