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IRA Rollovers Are No ‘Slam Dunk’ Under DOL Rule

By Murray Coleman August 25, 2017

No matter what politicians in Washington, D.C., decide to do next with the Department of Labor’s new fiduciary rule, planning experts see at least one legal wrinkle as likely to survive.

By the rule’s very definition of what it means to be a fiduciary, advisors are going to need to closely review how they treat rollover IRAs when clients leave an employer’s 401(k) plan or retire, says David Blanchett.

The head of retirement research at Morningstar warns in a new report that with partial implementation of the rule now underway, FAs need to adhere to best practices as outlined by fee disclosure mandates used by corporate pension and health plans.

In issuing its new fiduciary reg, Blanchett points out the DOL references disclosure rules that are part of federal guidelines mandated as offshoots of the Employee Retirement Income Security Act of 1974. Particularly relevant to advisors, he says, is an Erisa “best practices” checklist commonly known as a participant disclosure document.

“The bottom line is that IRA rollovers are no longer going to be a slam dunk,” Blanchett tells FA-IQ. “Advisors aren’t going to be able to simply assume that retirement savings held elsewhere need to be put more directly under their control.”

Moving client assets from workplace savings plans into IRAs, of course, is big business for advisors. The DOL has estimated roughly $300 billion a year is being rolled over from 401(k) plans to IRA accounts each year. Half of that total is now believed to involve some form of input from financial advisors, according to the Investment Company Institute.

“In the past, advisors were held to a lower suitability standard – not necessarily whether it was the right thing to do in keeping with each individual client’s best interests,” says Tim Maurer, head of personal finance at St. Louis-based Buckingham Strategic Wealth, which manages more than $10 billion.

In his practice, he starts the IRA rollover evaluation process by making sure to review all three options available to his clients: keeping their money in an old 401(k) plan; moving it to a custodial account set up by the advisor’s firm; or rolling it into the new company’s retirement plan.

Maurer also lets clients know about one key feature of rolling their savings into a new employer’s plan – leveraging their accumulated assets to take out loans.

Tim Maurer

“It’s very rare that we work with someone who can benefit from lending against their 401(k) savings – we’ve only recommended that type of activity a handful of times over the past 20 years,” he says. “But we still feel like it’s an important part of our fiduciary responsibility to go over in detail all of a client’s options.”

Even with the DOL rule’s broad IRA rollover guidelines, Maurer doesn’t expect any major changes in outcomes for his recommendations to clients. “It amazes me how restrictive and limited employer plans remain – even the plans that make a good number of funds available to their participants, not enough have quality low-cost passive options,” he says.

At Heron Financial Group in New York, which manages $300 million, president David Edwards says he expects implementation of the DOL rule to raise awareness by investors of their rollover options.

As a result, he’s exploring a host of new software services coming to market promising to automate his indie RIA’s longstanding rollover review process.

“We think that taking advantage of new technology in this area is going to be increasingly important for a growing firm like ours – it’s going to help us remain in a strong position to keep up with the rising demand for rollover advice,” Edwards says.

One of the software service providers he’s checking out is FeeX. Last month, the New York-based tech developer rolled out an advisor-enhanced service platform to review IRA transfers and 401(k) rollovers. “It’s certainly true that the DOL rule now requires advisors to offer prudent analysis of fees and services involved in rollover decisions,” says David Goldman, a FeeX executive.

In theory, that means FAs might need to take a closer look at each defined contribution plan’s participant disclosure document. Such a set can cover hundreds of pages in length detailing available features, costs and investments. “Each plan is different, which in turn results in each 401(k) plan offering its own unique disclosure document,” Goldman says.

What an online service like FeeX can provide to advisors is an ability to automatically extract and analyze a plan’s disclosures, matching such information with individual client account data. FAs can then have at their fingertips reports that sum up each client’s rollover situation.

Looking at industry surveys and talking to FeeX’s own clients, Goldman finds that anywhere from a third to half of an advisor’s assets under management can come from IRA rollover related transactions.

“Since this portion of the DOL rule only went into effect in early June, it’s still early in the process to comply with new fiduciary standards for rollover IRAs,” he says. “But we’re already seeing demand for our technology grow exponentially. And it’s coming from all corners of the industry, including large RIAs and broker-dealers as well as solo practitioners who don’t have their own compliance departments to monitor what the rest of the industry is doing.”