When moving on to a new job, people often leave their 401(k) retirement plan assets behind. So rolling those assets over into an IRA account makes total sense, right?
Not so fast.
There are plenty of reasons why advisors should pause before telling their clients to make the 401(k)-to-IRA move – and one of those reasons is the potential for a conflict of interest and regulatory consequences, according to experts.
"Regulators are not viewing rollovers favorably right now. The issue isn't when to roll over, it's when not to roll over," said Scott Hanson, senior partner at Hanson McClain Advisors, headquartered in Sacramento, California.
Regulators on the Alert
Both the Financial Industry Regulatory Authority and the Securities and Exchange Commission say advisors need a good reason to roll over because clients will usually have to pay higher fees in an IRA than in a 401(k), Hanson said. While Hanson McClain has done plenty of rollovers, he added, the firm is clear in telling clients about the pros and cons involved in moving retirement assets.
"Advisors better have good reason to roll over the 401(k) other than to generate fees and commissions for themselves," Hanson said. "That issue exists even for the most ethical fee-based advisor. You have to be very clear and document the reasons why you've recommended an IRA rollover. It all comes down to documenting."
Still, advisors have a definite advantage when advising clients about rollovers. According to Cerulli Associates research data gathered in 2013, advisors manage 70% of rollover assets, and 83% of the rollover assets that advisors manage have come from their existing clients.
Hanson points to several situations where it might be a bad idea for advisors to suggest a rollover:
The client is between the ages of 55 and 59 ½. The usual age for allowed retirement plan withdrawals is 59 ½, but a worker who's at least 55 and leaving a job can tap money from that job's 401(k) without early withdrawal penalties. However, if those retirement funds are transferred to an IRA, this age rule no longer applies.
The 401(k) includes a large portion of company stock. The tax advantages of net unrealized appreciation can be lost if the stock is rolled into an IRA rather than sent directly to a brokerage account. The 401(k) plan offers adequate investments. Some companies' retirement plans offer good investment options with relatively low-cost institutional pricing that may be lower than the fees in a similarly constructed IRA portfolio.
