Some Advisers May Want to Pause on Rollovers

How participants deal with their 401(k) assets when they leave a company is under more scrutiny from FINRA, but retirement plan advisers are less likely to be affected by the guidance.

Calling this a moment of heightened importance and vulnerability, the regulatory authority notes that investors are making a financial decision regarding decades of savings that may be needed for retirement income for many years. Rolling over these savings into an individual retirement account (IRA) is fairly common. FINRA has already stated that firm practices surrounding IRA rollover services will be a priority for 2014

FINRA pointed out in its recent guidance that more than 90% of funds flowing into traditional IRAs came from retirement plan rollovers, according to the an Investment Company Institute Study. The Government Accountability Office (GAO) took the Department of Labor (DOL) to task in a report issued in April, which said that plan-to-plan rollovers should be made as simple as rollovers into an IRA. The DOL’s requirements could do more to help participants understand the financial interests that service providers may have in participants’ distribution and investment decisions, the GAO said.

Retail securities brokers who are not involved in the participant’s 401(k) assets or prior plan arrangement will feel some impact from the guidance, according to Bob Lawton, founder and president of Lawton Retirement Plan Consultants LLC. “This is going to hurt the average investment adviser at a large company because a large portion of their earnings comes from rollovers,” Lawton tells PLANADVISER.

Roberta Ufford, a principal at Groom Law Group, agrees it is likely to be a bigger change on the individual retail adviser side, in part because guidance issued under the Employee Retirement Income Security Act (ERISA) already place some restraints on fiduciary advisers.

Fiduciary Considerations

Broker/dealer representatives are technically the ones regulated by FINRA, says Dan Notto, ERISA counsel at AllianceBernstein, so the guidance is definitely applicable. Registered investment advisers (RIAs) who are not broker/dealers, on the other hand, technically are not subject to FINRA notices, Notto tells PLANADVISER.

“However, RIAs are fiduciaries under the Adviser Investment Act,” Notto says, “and a lot of things that FINRA points out are the things that fiduciaries would have to take into account [in any event]. One would think they’re taking these issues into consideration anyway.”

Advisers who work on the institutional side and support an employer’s 401(k) plan may also be advising people who are separating from the plan, Lawton says, but these advisers are more likely to recommend that participants leave the assets in the plan. As Lawton points out, plan participants are more inclined to get advice from the existing recordkeeper or plan provider, and these entities are more interested in retaining assets than recommending a rollover.

As Notto points out, if the retirement plan adviser is already a fiduciary to the plan, the position of Department of Labor (DOL) is that a rollover recommendation is a fiduciary act. While the DOL and FINRA regulate different activities, in the rollover space there is some overlap. “One would think as an ERISA fiduciary, you should know about these sorts of things,” Notto says, such as the fees and expenses for the IRA versus the fees and expenses of the plan, and differences in the required minimum distribution (RMD) rules.

Avoiding Conflicts

It would be difficult to imagine how someone in that situation could be involved in a rollover without being ensnared in some kind of conflict of interest, Notto says. “It’s hard to imagine how someone could be better off by not being in the employer plan,” he says.

The biggest drawback for the average employee who rolls money out of a protected ERISA plan is the cost, Lawton says. Most balances are under a million dollars and are considered small, so they won’t accrue any of the price breaks that larger balances can command. Participants could “see the fees double easily,” according to Lawton, but the average participant has no knowledge of that, and when they leave the employer’s plan, they lose access to free investment advice.

Ufford feels the guidance is probably one piece in a broader trend of more regulation as people have more and more of their investable assets in plans and IRAs. “There’s a whole policy debate about whether our retirement system is working, and I think there is concern whether workers’ retirement investments will be sufficient at retirement,” she says. “If policymakers believe that investors are not accumulating enough to retire on because they are not getting good returns on their retirement investments in the current system, that could be a concern.”

Rollovers from retirement plans are getting a lot of attention from the regulatory community at the moment, Notto says. The transactions constitute a huge portion of the retirement marketplace, and rollovers constitute a lot of money in motion.

“All signs point to a higher standard that will be applied to financial professionals of all stripes in connection with people recommending that people roll out of a workplace retirement plan,” Notto says. “The FINRA notice is not saying anything new, but the regulatory authority is sending out a pointed reminder. The handwriting is on the wall. Rollovers are going to be a big deal.”