We’re living in an age when an unprecedented number of 401(k) plan participants must make decisions about assets they’ve accumulated in qualified retirement plans.
About 10,000 baby boomers are expected retire every day between now and 2030.[1] Workers who don’t have a plan for retirement—and many do not—need sound and objective advice about when to retire, and how to manage and invest their retirement savings as they approach retirement and after.
Almost three million Americans leave private industry employers every month.[2] Some have chosen to save in a 401k plan; others have saved because of automatic enrollment. Regardless, they all need to understand the steps required to take control of their retirement savings so they don’t take the path of least resistance and cashout.
For decades, financial professionals have helped 401(k) plan participants consolidate assets by rolling over accounts that were left behind with previous employers into either an IRA or a current employer’s plan, depending on the plan’s provisions for roll-ins. Consolidation simplified asset allocation and investment, and helped retirement investors gain a better understanding of what needed to be done to reach their retirement goals.
Today, asset consolidation continues to benefit 401(k) plan participants and many believe it can help improve retirement outcomes. However, if the Department of Labor’s (DOL)’s fiduciary rule becomes applicable in April in its current form, consolidation choices may change—and participants may find themselves with fewer choices.
The new rule expands the scope of fiduciary duty to include IRAs, so IRA rollover recommendations are subject to heightened scrutiny. Consequently, when a financial advisor recommends an IRA rollover, he or she will be subject to a heightened fiduciary standard and, consequently, additional compliance and operational requirements. The bottom line is that many financial advisors will be less interested in helping plan participants.
A higher fiduciary standard could be a positive development, as long as it does not encumber advisors to such a degree that they opt out, leaving participants who need financial advice with nowhere to go. Unfortunately, the path of least resistance—and lowest liability—appears to be pushing advisors out.
Financial advice is very important to retirement outcomes, as are investment options. Rollovers to IRAs and roll-ins to employer plans are both great choices for participants. However, Cerulli Associates and The Spark Institute found that 73 percent thought more assets would remain in defined contribution plans after the fiduciary rule was implemented.[3]
In another recent Cerulli Associates survey, respondents were of the opinion that the DOL perceives plans accounts to be “safer” than IRAs, an assumption that, if true, appears to ignore some of the possible risks associated with employer-sponsored plans, including bankruptcy and plan abandonment, as well as the plan challenges associated with mergers and acquisitions.[4]
Survey respondents also held that the DOL preferred roll-ins because plans provide access to lower-cost investments.[5] While that may be the case in larger plans that offer institutionally priced share classes, it’s not always the case with smaller plans—and most plan participants save and invest through smaller plans. IRAs often offer a greater diversity of investment choices, which can prove to be important in helping retirement investors reach their goals.
In some cases, rolling assets from one employer-sponsored plan to another may be the right choice. In others, it may not be. It is important for participants to have the opportunity to work with advisors, planners, or other financial professionals who can help determine that course of action that makes the most sense. Unfortunately, the new fiduciary rule may limit participants’ access to professional financial advice and that could affect retirement outcomes in unexpected ways.
[1] Kessler, Glenn. Do 10,000 baby boomers retire every day? The Washington Post. July 24, 2014. [https://www.washingtonpost.com/news/fact-checker/wp/2014/07/24/do-10000-baby-boomers-retire-every-day/?utm_term=.c5439132a5b4] [2] Bureau of Labor Statistics [https://www.bls.gov/news.release/jolts.t04.htm] [3] Steyer, Robert. Assets in or out is the question for plan execs. Pension & Investments. Novermber 28, 2016. [http://www.pionline.com/article/20161128/PRINT/311289978/assets-in-or-out-is-the-question-for-plan-execs] [4] Zulz, Emily. Under DOL Rule, Are IRA Rollovers Worth Advisors’ Time? ThinkAdvisor. December 14, 2016. [http://www.thinkadvisor.com/2016/12/14/under-dol-rule-are-ira-rollovers-worth-advisors-ti [5] Ibid.