Maximizing Your 401k: Understanding the Latest Regulations and Roll Over Options

Overview of 401k

Your 401k is one of the most significant assets you own. Deciding what to do with it when you leave your employer is a critical financial decision.

To help with this decision, the U.S. government has been on a ten-year quest to develop a regulatory scheme that protects retirement plan participants. While many of the rules involve advice, when someone is in the plan, a primary focus is the direction a financial advisor provides on whether you should roll your 401k to an IRA.

Proposal from the Department of Labor

The first such attempt happened in 2010 when the Department of Labor (DOL) proposed sweeping changes to the retirement landscape with their so-called Fiduciary Rule.

The proposal required financial advisors to act in the retirement plan participants’ best interests, including advising someone on whether they should roll their 401k into an IRA.

It barely got off the ground before the 5th Circuit Court of Appeals canceled it on March 15, 2018, when it ruled that the Department of Labor overstepped its bounds.

Review of Two Regulatory Silos

In addition to sweeping bank reforms, the 2010 Dodd/Frank bill tasked the SEC with reviewing the two regulatory silos that financial advisors come under to merge the two into one possibly.

You might be surprised that there are two silos. The first is for broker-dealers who worked under a suitability standard. The second is for investment advisors who, in addition to suitability, are fiduciaries who owe their clients a higher loyalty.

Regulation Best Interest

Beginning June 30, 2020, broker-dealers will operate under a new standard called Regulation Best Interest. This requires brokers to better align their interests with those of their clients by eliminating conflicts of interest, such as proprietary product requirements, sales quotas, or sales contests.

Registered representatives (brokers) will be called financial professionals. Any advisors who are fiduciaries can continue calling themselves financial advisors.

Final Rule to Close the Circle

The financial industry had just adapted to the new SEC rules when on July 7, 2020, the Department of Labor issued a final rule to close the circle, begun by the 2010 Fiduciary Rule and the new SEC best interest rule.

The DOL rule brings back the five-point test to determine if an advisor is a fiduciary.

1. The financial advisor must render advice as to the value of securities or other property;
2. The advisor must do so regularly;
3. The advisor must do so under an agreement with the client;
4. That advice will serve as a primary basis for the client’s investment decisions; and
5. The recommendation is to be based on the particular needs of the investment or retirement plan.

It also withdrew guidance from the so-called Deseret Letter. The DOL had opined that rollover recommendations were not fiduciary investment advice in that guidance.

The DOL sent the final rule to the Office of Management and Budget in December. Because of the administration change, the rule will be put on hold and eventually modified or canceled.

So Back to the Question: Should You Roll Over Your 401(k)?

As you can see, the government is concerned that people that roll a 401k to an IRA end up paying higher fees. And if you have a plan with institutional share classes, work with a financial advisor, and move your plan to an IRA, your costs will likely go up.

But many 401k plan participants work for employers that do not offer institutional pricing nor a great fund lineup. For them, they can roll over without incurring higher expenses and maybe end up with better choices.

There are other reasons to do a rollover besides costs: convenience, not having to deal with the plan for withdrawals, beneficiary changes, or other housekeeping changes.

Also, the skill set involved in growing your accounts is different from providing income. Maybe you will find a financial advisor well-schooled in bonds, annuities, dividend stock funds, the tools needed to generate retirement income.

The advisor could also provide additional services such as estate planning. They can keep you abreast of vital rule or law changes, such as the recent change that made having a trust as a beneficiary in a retirement account less appealing.

Conclusion

Your 401k is one of the most significant assets you own. Deciding what to do with it when you leave your employer is a critical financial decision. With the government on a ten–year quest to develop a regulatory scheme that protects retirement plan participants, it is important to understand the rules and regulations that govern the process of rolling a 401k to an IRA. The Fiduciary Rule, Dodd/Frank, and the new SEC and DOL rules all have an impact on the decision. Ultimately, the decision to roll over a 401k to an IRA should be based on the individual‘s particular needs and the fees associated with the move.

Please be sure to speak to your advisor to consider the differences between your company retirement account and investment in an IRA. These factors include, but are not limited to, changes to the availability of funds, withdrawals, fund expenses, fees, and IRA-required minimum distributions.