Advisors who engage high-profile 401(k) rollover expert Ed Slott in conversation or hear him speak to larger audiences are treated to an onslaught of horrific anecdotes about what can (and does) go wrong with 401(k)s and IRAs. They might seem like worst-case scenarios, which is really the kicker; far from industry urban legends, these are situations he routinely encounters.
He often speaks with an exasperated tone—and for good reason. Much of what he talks about is the exact same thing he’s talked about for years (even decades), but now, today, at this very moment, it’s affecting more people than ever before.
Why? Demographics of course, specifically as they relate to 401(k)s.
“We’re seeing the first major wave of 401(k) transitions,” Slott says. “It’s time to pull the trigger on this 401(k) experiment and see if it’s really worked. The year 2013 was the first that we saw more going out of 401(k)s than going in, so we’re turning the corner and it affects more people. I said this 20 years ago and people said ‘I’ll worry about that in 10 years,’ like it’s global warming or something. We’ll good luck with that.”
Slott sat with 401(k) Specialist for our upcoming issue, a preview of which is below. It was an impassioned conversation about the incredible opportunity, and fatal pitfalls, presented by the current and coming 401(k) rollover frenzy. Specifically, he offered up three of the biggest mistakes he sees. If they seem obvious, ask yourself why they’re increasing at an exponential rate.
1). Not checking beneficiary forms –“If the beneficiary form isn’t updated, a basketball game breaks out. One beneficiary gets five lawyers, the other beneficiary gets five lawyers and the money just dribbles away. When you ask about beneficiary forms, what you’re really doing is asking about the family. And that’s good business; that’s what builds relationships and that’s what makes you stand out.”
2). Not knowing and keeping up with rollover rules—“Most advisors don’t realize rules change almost weekly. Even if they are up to speed, some of the bills read like they’re written in Sanskrit. We now have the one rollover annually rule. If you do a second rollover, the client will lose their money. I’ve polled advisors and I said “How many of you are aware of this new law?” The best I ever got is maybe a third of the audience raised their hands.
3). Inherited IRAs—”This is where some of the biggest mistakes are made. Inherited IRAs are subject to different and harsher rules over and above those for regular IRAs. For example, a non-spousal beneficiary cannot do a rollover. If a spouse inherits an IRA, then she could roll it over to her own IRA; no problem. But let’s say a dad dies and leaves his IRA to his son. Well, sonny boy can’t wait to get his hands on the money, so the attorney puts the son’s name on it and that’s the end of the account—game over. It’s a taxable distribution because a non-spouse beneficiary cannot do a rollover. It has to be set up as a properly-titled and inherited IRA. If it goes to the beneficiary’s own IRA, it’s taxable and a fatal error. The dad spent a lifetime accumulating a $600,000 rollover and now a big chunk is gone.”
See Also:
- Why is IRA Rollover Superstar Ed Slott So Happy?
- Ed Slott Defuses ‘The New Retirement Savings Time Bomb’
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
