403 b Plan Rollover to IRA

New Fiduciary Rule

Finally, however, to many people’s surprise, President Trump’s Department of Labor, run by Eugene Scalia, Supreme Court Justice Antonin Scalia’s son, implemented the Fiduciary Rule.

They removed some of the more demanding requirements and possible legal challenges provided to clients. Still, they kept the core tenant that financial advisors advising retirement plans and participants are fiduciaries. Most advisors, when recommending a client roll over their retirement account to an IRA, are also fiduciaries.

403b Plan Transfer

Remember, the Fiduciary Rule applies only to private-sector employer-sponsored retirement plan, such as 401(k)s, SEPs, SIMPLEs, and 403(b) plans under ERISA. The 403(b) plans of public employees, such as teachers, are not covered by ERISA, so they are not subject to the new fiduciary law. It only applies to them if they decide to roll over their 403(b) to an Individual Retirement Account (IRA). Roth’s, traditional, and rollover IRAs fall under the new rules.

The Obama administration believed the Rule was needed because conflicts of interest caused 401(k) participants and IRA owners to pay higher fees, resulting in smaller account balances.

What do I mean by ‘conflicts of interest’? For example, some firms paid their advisors bonuses and benefits if the financial advisors sold that firm’s proprietary products. This is no surprise, but it is surprising that these conflicts go on with retirement plans—given that ERISA forbids conflicts of interest.

But ERISA stipulated that the prohibition against conflicts applied only on five conditions:

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 advice is to be based on the particular needs of the investment or retirement plan.

Financial Advisor Tim Hayes Believes the DOL Got It Right

By striking a balance between new protections for consumers with additional burdens on the financial services industry, Financial Advisor Tim Hayes believes the Department of Labor (DOL) hit a home run with its new retirement advice rule.

Fixing the Law

By eliminating a 1975 rule, made when pension plans were much different than they are today, the Department of Labor rectifies the contradiction that financial advisors with conflicts of interest are providing financial advice to retirement accounts even though ERISA, the law governing these accounts, prohibits this from happening.

Lowering Investment Fees

What does the new rule mean for consumers? “If you have a 401(k) or 403b, the advisor fees might come down. If you roll over the 401(k) or 403b to an IRA, the fees in the IRA should be competitive to what they were in the 401(k).

Retirement Planning – Employees who leave their employer can keep their 401k or 403b there or rollover to an IRA. If they decide to roll over, I help build their IRA portfolio. I also build portfolios for clients saving for retirement.

• IRAs
• Annuities
• 403b Financial Advisor
• Pension Max for Public Employees
• IRA Rollover From Employer Plan

Employer-sponsored Retirement Plan

The advice must be given regularly and must be the primary basis for the client’s investment decisions. The DOL believes it allowed financial advisors with conflicts of interest to provide advice within employer-sponsored retirement plans without violating ERISA’s prohibition.

Plus, the DOL felt that the 1974 exemptions were put in place when there was no such thing as an IRA or a 401(k), and companies invested the retirement money for their employees. However, now that individuals are responsible for their own investment decisions, new rules are needed.

IRA Rollovers

For example, the DOL believes people are rolling over their 401k into IRAs when it would cost them less if they remained in the 401k. Moreover, under the old rules, rollover advice never fell under ERISA guidelines because the rollover happened once.

So, the new fiduciary rule reinterprets the five-part test so that now more financial professionals fall under the ERISA standard of who is a fiduciary. It also removed a previous ruling that rollover advice was not fiduciary advice. Instead, it requires that any advisor falling under these standards work in your best interest, including when they recommend a rollover.

Financial Services Industry is Adapting

More and more financial products, such as variable annuities and life insurance programs, can be fee-based. For example, a 403b tax-sheltered annuity can be part of a fee-based advisor’s assets to calculate your fee. As a result, the product is stripped of some of the costs associated with a commission-based product.

Firms are also removing conflicts of interest to align with the new Best Interest Standard. The DOL also now uses that standard in their interpretation of who is a fiduciary advisor under ERISA. When the investing public works with an advisor, they benefit from having a similar standard for conduct as Best Interest aligns closely with the fiduciary responsibilities in the 40 Act.

Possible Advantages of a Rollover for Educators

If you have a 403b and work with a financial advisor, now is an excellent time to review the financial planning arrangement, fee or commission, best interest, or fiduciary. Also, if you are thinking of rolling over a 403(b), ensure your decision is consistent with the new rule.

A rollover of a 403b might make sense for a retiring educator because most of them purchased their 403b under a suitability standard and any rollover to an IRA would be under either the new SEC Best Interest Standard or the DOL fiduciary standard. Hopefully, these new rules lead to lower costs and better choices for the 403b rollover.

TPAs – Many school systems now use a TPA or Third-Party Administrator to help run their tax-sheltered annuity (403b) plans. In Massachusetts, the most common are TSA Consulting and the OMNI Group. Advisors process paperwork such as a rollover request, salary reductions forms, loan forms, and withdrawals through the TPA.

Financial Solutions Advisor

I remain registered as an investment adviser representative (fiduciary) and as a registered representative (financial professional). Most of my business is as a fee-only investment advisor representative, where I charge a client a fee or an hourly rate for my advice. I like this arrangement because it is not product-based, and I can get paid to provide ongoing advice to my clients.

However, I keep my registered representative license because when I compare a commission product, it makes more sense for the client. For example, a new client who is 25 years old wants to purchase a 403b with $2,000—I cannot imagine charging them a fee for the next forty years.

Also, I like to use American Funds for some clients with big 401k or 403b, if I recommend that they roll over their money. If their 403b account balance is over a million, they pay no sales charge. And American Funds has some of the lowest management fees for actively managed funds. They also offer excellent funds for customers interested in generating retirement income. But I need to have a registered representative licensed to provide this option.