A new finding from Pontera makes the case for 401(k)s over individual retirement account (IRA) rollovers.
The fintech company’s recent finding shows that 59% of surveyed advisors chose not to rollover a client’s 401(k) into an IRA or another account due to “better plan benefits and the advisor’s ability to manage these assets in plan via Pontera.”
The analysis argues rolling over a 401(k) into an alternative retirement account could come at the expense of “better” 401(k) benefits, lower fees, institutional fund access, tax benefits to employer stock, creditor protections, and loan options. Past Pew Research has estimated that of the $516.7 billion in IRA rollovers from plan accounts in 2018, retail investors could lose $45.5 billion over the next 25 years, and solely from higher fees.
Pontera adds that advisors recommend rollovers because of a complex and expensive 401(k) advisory method that requires paperwork, security measures, and compliance requirements.
Pontera also notes that rollovers can mean more revenue for advisory firms, yet can be subject to new regulation pending the Department of Labor’s (DOL) upcoming fiduciary rule, which may include whether rollover advice is regarded as fiduciary advice. While the DOL’s Prohibited Transaction Exemption (PTE 2020-02) allows advisors to receive higher compensations for a 401(k) to IRA rollover, advisors must comply with six rules outlined by the regulatory house.
“This finding shows that our partners are employing their fiduciary duty in the face of an excessive rollover trend…,” said Yoav Zurel, chief executive officer at Pontera. “Retirement plans are often designed with exceptional benefits by employers and plan fiduciaries.”
The research cites common misconceptions to managing 401(k)s, adding that the retirement accounts may offer lower fees than an IRA and can be managed by an advisor as long as it’s consistent with the Securities and Exchange Commission (SEC) custody rule.
Yet, past findings have showed that investors do want rollover options to alternative accounts. A 2020 study from Hearts & Wallets found a high preference, among older investors, for rollovers from an employer plan into an IRA when workers retire. The findings also showed that consumers with a retail advisory account and a workplace account were likelier to recommend their advisors to friends and family.
This preference continues to be true among workers and investors today. A 2023 Cerulli report on U.S. markets found the IRA marketplace grew from 31% to 38% in the past decade and is expected to grow to 41% by 2027. Much of the asset growth was due to rollovers from defined contribution (DC) plans, found Cerulli, with rollovers accounts for $2.9 trillion in IRA asset growth between 2016 and 2021.
SEE ALSO:
- IRA Assets Approach $14 Trillion Thanks to 401(k) Rollovers
- Older Americans Want Retail Advice, Rollovers: Study
- Bill Makes 529-to-Roth IRA Rollovers Penalty-Free
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
