Is your adviser encouraging you to do an IRA rollover? Make sure they’re following this new rule

IRA rollovers are common, whether they’re from an old 401(k) or just one account to another, but a newly implemented Department of Labor rule says financial advisers suggesting the move have some explaining to do. 

Retirement Tip of the Week: If you work with a financial adviser and they are suggesting you do an IRA rollover, a rule made enforceable July 1 says the reason must be in writing. Make sure you get that document, for your sake as well as your adviser’s. 

The key components of the rule are to review in depth then explain how this rollover best serves the client. Many financial advisers may already be doing this for their clients if they are fiduciaries, which means they are required to work in their clients’ best interests ahead of their own financial gain, but the DOL now requires it. 

The rule, known as the prohibited transaction exemption 2020-02,was passed in December 2020 and went into effect in 2021, though enforcement did not begin until February 2022. Under the rule, a recommendation for a rollover from an employer-sponsored plan to an IRA is considered a prohibited transaction if the move is not in the client’s best interest and the adviser receives compensation for it.

See: Watch out — this one mistake could cost you thousands when you rollover your 401(k) to an IRA

The mission behind this new rule is to protect investors from rolling money over from one account to another for the wrong reasons, such as a financial adviser’s monetary gain for the transfer. An extensive review, and explanation of the recommendation, will clearly outline to investors why a rollover is in their best interest – and keeps advisers and clients on the same page. 

“Rollover recommendations are a primary concern of the Department, as financial services providers often have a strong economic incentive to recommend that retirement investors roll assets out of ERISA-protected plans into one of their institution’s IRAs,” the DOL said in an April 2021 breakdown of the rule. “The decision to roll over assets from a plan to an IRA is often the single most important financial decision a plan participant makes, involving a lifetime of retirement savings.” 

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For 401(k) to IRA rollovers, advisers will have to consider the alternatives to an IRA (such as leaving the money in the workplace plan), a cost comparison for both accounts, if the employer pays for any of the administrative expenses and the different types of investments, or services, provided in either account, the DOL said. Advisers will have to do extensive data gathering, including from the client as well as alternative sources, to clearly explain why this move is a good one. 

For rollovers from one IRA to another, or from a commission-based account to a fee-based one, the recommendation letter must explain the services to be provided from the new account and the long-term costs of the move, as well as “economically significant” investment features, the agency said. 

The rule applies to any registered investment advisers who offer fiduciary advice to retirement investors.

About $534 billion was rolled over from employer-sponsored plans to IRAs in 2018, according to Internal Revenue Service data cited in the Investment Company’s 2021 Fact Book. Comparatively, $70 billion was contributed to these accounts that year. 

Rollovers from an old workplace plan to an IRA can make a lot of sense. If there’s not a lot of money in the 401(k), but the individual no longer works at that job, she can roll the assets into an IRA and then continue to contribute to it so that it grows more (when people leave their jobs, they can’t keep contributing to their old 401(k) plans).  

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Some people may choose to do a rollover because the fees are lower at the new account than the old one. Another reason: investment options. Investors may find they have better choices in an IRA, or a new IRA if they already have one, than their 401(k) or old account, though determining that will take a bit more research and may also depend on the investor’s needs. 

In other scenarios, keeping money in a workplace plan may be a better choice, especially for workers still at the companies offering the 401(k) plan. Aside from potentially lower fees and superior investment choices, those with active 401(k) plans may be entitled to employer matches to their contributions. These workplace plans come with other benefits, such as more stringent protection against creditors. Former employees will have to check with their companies’ rules about whether or not they can remain in the plan after they’ve left. 

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