Your 1 minute case study on 401K Retirement Plans: A Rollover to an IRA Account

[LarkspurRixtrema]

Regardless if your clients are plan sponsors or individuals who invest in their retirement accounts, as the advisor you can be a great fiduciary by helping them to achieve their goals. You can accomplish this by diligently reviewing plan options, finding a more affordable plan administrator, screening for the best investment funds that will suit the participants or advise on the rollover, you as the advisor should have all necessary information to act in the best interest and to be a good fiduciary for your client.

For example, if you are advising an individual who wants to rollover from a 401k plan to an IRA account, you can help them to see the benefit of such a move by comparing various fees like the admin fee vs. advisory fee, advisory fee vs. benchmark advisory fee, risk of investment vs. risk tolerance. The screenshot below illustrates that a rollover from a qualified plan to an IRA account is a good move for the participant because it reduces the cost of the retirement account to 68 bps (advisory fee of 50 bps and the cost of funds 18 bps) from 91 bps (admin fee of 5 bps and the cost of funds 86 bps). Also, the suggested rollover portfolio is better built to meet the client’s risk tolerance, which is very important, since risk management is the integral part of the retirement planning.

See more: 1 minute case study on 401K Plans: A Rollover to an IRA Account

 

[Allen Trent]

Fiduciary? I must have the wrong definition of fiduciary

Are you disclosing that they also could likely rollover the money to a new employers plan & retain access to loan potential? Disclosing that there is no early distribution penalty from a 401k at age 55 compared to age 59 1/2? Disclosing that 401k plans have much greater credit protections than IRA? Reviewing to see if their 401k has embedded Annuity payout factors based on old mortality tables & old guaranteed rates?

Or is there merely a tool to assist getting the money moved over to an IRA to create AUM revenue?

But what would I know, i am merely a multi line agent covering PC & Life.........

 

[LarkspurRixtrema]

Most certainly the tool covers everything you described and much more. However, it does not include this "Reviewing to see if their 401k has embedded Annuity payout factors based on old mortality tables & old guaranteed rates?" which would be extremely difficult, so it is emphatically not a tool to facilitate a rollover no matter what.

If you are talking about outlawing rollovers completely, then this is a legislative issue (not for us). And I am sure some participants would not be happy with losing that choice. However, I am certainly sympathetic to your general line of thinking i.e. 401ks offer many more benefits. But if they are stuck in a high expense 401(k) with revenue sharing etc. how is it in their benefit to stay in there?

 

[Allen Trent]

Agree. The problem is we won't know until later if it was a mistake to rollover. IE: a 40 yr old today may plan to not need the funds until 60, but due to financial issues or job loss or death of a spouse, they may need to access at 55 or even take loans from 401k. A 10% tax on those early distributions may eat up the small expense ratio savings.

I just believe the way fiduciary standards are set, it is near impossible to gather all the facts to give a go ahead direction to roll to an IRA. I just don't know how a fiduciary can make the case that a couple basis points expense ratio savings overcomes 4 or 5 other items built into their 401k plan they are leaving or the new employer plan they are going into today or in future years.

I am sure it will be litigated in court in the years to come attorneys judging after the fact what was in the clients

 

[adjusterjack]

Also, the suggested rollover portfolio is better built to meet the client’s risk tolerance, which is very important

Would the suggested portfolio be paying the advisor a commission?

 

[LarkspurRixtrema]

Would the suggested portfolio be paying the advisor a commission?

Most usually no commission (since fiduciaries are not allowed to charge for it). If a broker used it, it technically could, but would have to be disclosed prominently and would be included in the total fee calculation right on top of the report.

 

[DHK]

The problem is we won't know until later if it was a mistake to rollover. IE: a 40 yr old today may plan to not need the funds until 60, but due to financial issues or job loss or death of a spouse, they may need to access at 55 or even take loans from 401k. A 10% tax on those early distributions may eat up the small expense ratio savings.

That's not a problem. You cannot be held liable for future unexpected needs. Only for not disclosing things that could be an issue at the time of the interaction and sale.

If you're 40 and you don't see yourself needing to access these funds and want to invest long-term with lower cost ratios, then there's no problem moving that over to an IRA. It would be the CLIENT'S FAULT AND ISSUE if they changed their minds or a situation came up that they did not anticipate.

 

[DHK]

Would the suggested portfolio be paying the advisor a commission?

There are 401(k) plans that allow the participant to pay for ongoing portfolio management advice... so they could be paying a commission or fee either way.