IRA Rollovers Can Have Steep Costs When Done Wrong, New Study Shows

The goal is to give investors an objective, written review of their available options with specific reasons why a rollover recommendation is in the investor's best interest. From FAQ no. 15 (emphasis added):

"For recommendations to roll over assets from an employee benefit plan to an IRA, the relevant factors include but are not limited to:

• the alternatives to a rollover, including leaving the money in the investor's employer's plan, if permitted
• the fees and expenses associated with both the plan and the IRA
• whether the employer pays for some or all of the plan's administrative expenses, and
• the different levels of services and investments available under the plan and the IRA."

FAQ no. 15 provides additional guidance to supplement the high-level factors. For example, suppose an advisor's analysis finds that the employee's 401(k) actively managed equity fund's performance is highly correlated with the S&P 500 index's performance. The advisor's rollover IRA can access an S&P 500 index fund at a lower cost than the employee's current holding. 

That lower fee comparison is insufficient, the DOL cautions: "When considering the alternatives to a rollover, the financial institution and investment professional generally should not focus solely on the retirement investor's existing investment allocation, without any consideration of other investment options in the plan."

In other words, if the employee can invest in an S&P 500 index fund in the 401(k) plan, the plan's index fund should be considered as an option. 

The DOL lists several other factors to consider in a rollover analysis:

• the long-term impact of any increased costs
• why the rollover is appropriate notwithstanding any additional costs, and
• the impact of economically significant investment features such as surrender schedules and index annuity cap and participation rates.

PTE 2020-02 means more work and disclosure for possible rollovers. The good news is that clients have more confidence in the advice they receive and they'll have a better understanding of their options' fees and other costs.

Ed McCarthy is a freelance financial writer who holds the certified financial planner and retirement income certified professional designations.