The retirement plan industry loves a good trend. Recent predictions had retiring baby boomers displacing a massive (and lucrative) “rollover surge” that could top $11.7 trillion by 2020, according to research from Cerulli Associates.
However, thanks to regulatory change and economic considerations, some now predict a shift in momentum back to keeping assets in the 401(k) plan. So it is for boomers and their penchant for keeping us guessing.
If true, it would certainly have an impact, as rollovers have long been the “no-brainer” decision for both companies and participants when an exit is imminent.
Indeed, Morningstar’s head of retirement research, David Blanchett, Ph.D., CFA, CFP, claims it’s long been a common policy for advisors and plan sponsors to encourage departing employees and retirees to roll money out of the company plan and into an IRA.
“The prevailing thought is that when a participant is on the cusp of retiring or leaving after a significant tenure, retaining them in the plan is seen as a liability for the plan sponsor.”
The arguments in favor of rolling to IRAs are well-known: access to professional financial management, more investment choices and at times, lower fees—all of which favor the investor.
It also doesn’t hurt the advisor who gets paid for the rollover and subsequent counsel.
“Rollovers are a huge sales opportunity for retail financial advisors,” adds Skip Schweiss, president of TD Ameritrade Trust Company. “We’ve seen on average that half of an advisor’s book of business is IRAs.”
Another factor is that companies historically target education and benefits to active employees and provide little to no guidance to those who aren’t on the payroll.
Plan sponsors would rather avoid the hassle of keeping track of employees who stay in a plan but leave the company, and Blanchett says it would often increase administrative costs accordingly.
“They want to make it more of a headache for these exiting participants to access money if they decide to stay in the plan.”
The result is that, for the most part, the rollover wave had been proceeding swimmingly.
That is, until the (ugh) Department of Labor came along with its fiduciary rule, prompting some to voice concerns—and frightening statistics—about its potential chilling effect on rollover activity.
The new rule requires advisors to make recommendations within a fiduciary framework, and specifically those that apply to rollovers and distributions. Though many operate under that auspices already, Cerulli recently predicted that the rule will “put nearly half of the projected IRA rollover assets ‘at risk.’”
According to its September 2016 report, “this new regulation will impose greater scrutiny and complexity on the rollover market and potentially disrupt future flows” and that there is “… general consensus in the retirement industry that more assets will remain in employer-sponsored DC plans because of the rule.”
Blanchett notes that advisors encourage rollovers and not always when it is in the best interest of the investor. That’s all going to change he says and despite the rule’s delay, the “ship” is moving in the fiduciary direction regardless.
“There’s been a clear shift in the industry to ensure you are doing the right thing and they will begrudgingly incur any added administrative cost or procedure that comes with it,” he says.
Schweiss adds that what the rule’s bottom line impact on firms remains to be seen, but the increase in due diligence is a given.
“The rule will make an advisor stop and think: is this the right move for my client or prospective client?”
Blanchett co-authored a study that suggests a framework for advisors on how to consider rollovers in light of the rule.
Primarily, it will mean a fee comparison, a review of the quality and scope of investments offered, the services provided (e.g., financial planning), as well as other unique considerations that should all be considered.
Once advisors check all items and examine the results in light of the fiduciary rule, staying in the plan may be a clear choice.
The rule also comes on the heels of extensive litigation aimed at (what else?) excessive plan fees—yet another reason for participants staying put.
Blanchett observes that there is an explicit cost of litigation and while employees in a plan may sue, these barriers are coming down.
“Larger companies are offering high quality and lower cost plans, and it’s in the sponsor’s best interest to help employees retire successfully.”
Schweiss concurs and says that as expenses fall as a result of the lawsuits, transparency is increasing, and investors are becoming more aware.
One other factor? Money talks, or more specifically, retirement assets talk.
With the influx of Baby Boomer retirement assets, companies have begun to reconsider the rollover playing field.
“When you are at retirement, your balance is at its largest and its most attractive,” says Blanchett. “Companies realize that they lose economies of scale when significant assets walk away.”
Managing a larger pool of assets allows plan sponsors to offer lower cost share classes and advantageous yield fee negotiation, Schweiss notes.
And financial wellness, of all things, is playing a larger role in keeping participants close, another reason for its importance. A decade ago, companies cared very little for the touchy-feely concept. Now they want their financially fit employees, and their associated retirees.
Blanchett thinks more companies will add solutions that cater to the demographic.
“We’ll see the addition of managed accounts as well as more targeted marketing plans and educational sessions aimed at addressing [retiree] needs to keep them engaged.”
So rollover or stay in the plan—what’s the right answer? Both Blanchett and Schweiss caution that every case is different, of course, and advisors need to weigh individual needs.
“There are too many solutions that focus on fees,” Blanchett says. “Whether or not to rollover needs to be a holistic decision with advisors moving more towards financial planning services that help show people how to retire.”
Ultimately, until the fiduciary rule is implemented (if at all), it’s business as usual for advisors. And when (if) it comes to pass?
Investment advisors will be able to more easily adapt to the fiduciary guidelines says Schweiss.
“They’re perfectly positioned.”
Lynn Brackpool Giles is a contributing editor to 401(k) Specialist. Giles is a former Managing Director of Communications and Consumer Services for the Financial Planning Association (FPA), where she oversaw all corporate, legislative, and consumer communications. In her current journalistic practice, she is a frequent contributor to numerous financial services industry publications.
