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Should You Roll Over Your 401k to an IRA?

Tim Hayes, CRPS®, AIF®, AWMA®, CFS™, CTS™, CES™, APMA®, CAS® 

Your 401k is one of the most significant assets you own. So 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.

The Fiduciary Rule

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 participant’s 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.

Read More: DOL Fiduciary Rule Timeline & Updates

Dodd/Frank

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.

The New Rule from the SEC

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 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.

Read More: Fee-Only or Commission What’s Best for You?

The DOL Resurfaces

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. (The DOL decided the rule will go into effect on February 16, 2021, and will publish related guidance soon)

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

As you can see, the government is concerned that people that rollover 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.

Read More: Do You Have After-Tax Money in Your 401k?

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.

Please be sure to speak to your advisor to carefully consider the differences between a company retirement account and an IRA investment. These factors include changes to the availability of funds, withdrawals, fund expenses, fees, and IRA-required minimum distributions.

Tim’s Rollover Checklist

  • review the fees in your 401k plan
  • review the fund lineup in your plan
  • check if there are sufficient choices to provide retirement income
  • calculate your retirement risk tolerance score
  • compare your risk score with your current allocation
  • recommend if you should leave your money in the 401k or rollover to an IRA
  • design a portfolio using your retirement risk tolerance and income goals

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.

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