Talk of a 401(k) rollover storm, tsunami, surge (whatever the metaphor) hits fever pitch and the federal government’s solution is to inject more electrically-charged air.
The DOL’s final fiduciary rule adds more confusion and uncertainty to an already confusing and uncertain situation. So how, specifically, will it affect rollovers out of the 401(k) plan?
The Wall Street Journal says they could “slow to a trickle,” as the new rule will make it harder for advisors to recommend a 401(k) to IRA rollover upon a participant’s retirement, and they will have to clearly document why it is in a client’s best interest to do so.
“We’ll definitely see fewer rollovers,” says Jason Roberts, a pension-law attorney and chief executive of Pension Resource Institute, a compliance consulting firm.
Not so fast. Cerulli Associates “does not anticipate a slowdown in rollover activity in the foreseeable future,” and is sticking with its original prediction that total IRA assets will hit $11.7 trillion by 2020.
The reason, according to the Boston-based research and consulting firm, is that “Broker-dealers are prepared and certain 401(k)s don’t allow for partial withdrawals. This combination of preparation and need should mean a continual flow of rollover business no matter DOL action.”
So which is it?
While acknowledging it’s “hard to say,” Washington-watcher Skip Schweiss sides with the former.
“There are an awful lot of financial advisors out there (and I’m using that term broadly; brokers, insurance agents, etc.) that have 40 percent to 50 percent of their books in rollovers,” says Schweiss, managing director of advisor advocacy and industry affairs for TD Ameritrade Institutional, as well as head of the firm’s retirement plan services. “They’ll have to have greater care in selling [the value-proposition of] their businesses and justifying those rollovers. For better or worse, rollovers are often a vehicle for products sold, and they’re going to be hard-pressed to say their clients are better off in the rollover than they are in 401(k) plan.”
Of course, he notes it’s not all apples-to-apples and focused just on fees. RIAs in particular can provide a greater level of service than participants are getting in the 401(k) plan; for instance, with holistic financial planning that can justify the rollover activity.
“There is an argument to keep the retired employees assets in the plan in order to take advantage of break points and economies of scale, but that will really be up to the individual plan sponsor. Some will say they don’t want to wake up in 10 years and have to try and track the retiree down, so just get it out of there now.”
He adds a stark piece of advice, especially for “RIAs that haven’t been paying attention.”
“I read a piece written by an RIA that said, ‘Well, it will just be a few more pieces of paperwork. No big deal.’ I beg to differ. This is an ERISA regulation, and a fiduciary is not a fiduciary is not a fiduciary. By that I mean we’ve had all this talk about fiduciary for years, and there’s the ’40 Act definition of fiduciary versus ERISA. Bottom-line: RIAs will have to up their game.”
Advisor Alex Assaley agrees, and sees it as a refreshing development for the industry overall.
“401(k) advisors will need to decide if they want to provide individual advice at the participant level. If so, there are ways for them to act as fiduciaries on the plan and still handle the rollover as long as the differences in the cost structure, services provided and the benefits of doing so are clear and transparent,” Assaley, managing principal and lead advisor with AFS 401(k) Retirement Services and a young Turk of retirement planning, explains.
More importantly, he concludes, it’s good for the industry, because advisors “will really have to decide if a rollover is in the client’s best interest. Sometimes it absolutely makes sense to keep the assets in the 401(k) plan. So the rollover market will change dramatically, but it’s not going away.”
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.
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