Getting smart on the new rules for 401(k) rollovers

Getting smart on the new rules for 401(k) rollovers

September 03, 2021

Monterey Herald, 401(k) 

If you read the financial press, you have surely read that many Americans are woefully unprepared for retirement. Unfortunately, this is true. However, it is also true that retirement accounts hold a vast amount of America’s wealth. The numbers boggle the mind. According to a report by the Investment Company Institute, as of March 31, 2021, Americans had over $35 trillion in retirement assets. Of that, nearly $7 trillion is held in employer-sponsored 401(k) plans, up from $3.1 trillion 10 years ago. Apparently, not everyone is unprepared for retirement.

People who retire or change jobs face a challenging question: what should they do with the money in their previous employer’s 401(k) plan? Literally, billions of dollars are at play every year as investors weigh the options of leaving it in a 401(k) plan or rolling it into an IRA. With so much money sloshing around, is it any wonder that the IRA rollover business attracts its share of financial sharks?

Recently, the U.S. Department of Labor, the agency that oversees 401(k) plans, issued new rules designed to take some of the bite out of those financial sharks. If you are thinking about doing a rollover, you will likely feel the effects of these new rule. Here is a quick overview.

A primary purpose of the new rules is to eliminate the conflicts of interest advisors inherently face when they talk about rolling assets from a 401(k) plan into an IRA. For example, if an advisor earns a commission by rolling your 401(k) assets into an IRA, or earns a fee by managing assets that you roll into an IRA, that advisor has a conflict of interest when it comes to advising you to do a rollover. It will always be in the advisor’s best interest to get you to do the rollover, but how do you know it is in your best interest to do so? Maybe it would be better to leave in in the 401(k).

Under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (IRC), individuals and institutions who provide “fiduciary investment advice” to plan sponsors, plan participants, and IRA owners may not receive payments creating conflicts of interest, unless they qualify for a prohibited transaction exemption.” In this context, according to the Department of Labor, “a firm or investment professional provides fiduciary investment advice to the extent she renders investment advice for a fee or other compensation, direct or indirect, with respect to any money or other property of such a plan, or has any authority or responsibility to do so.” In other words, if an advisor gets paid to give you investment advice on a plan, that advisor is a fiduciary and they had better get a prohibited transaction exemption.

The requirements to qualify for a prohibited transaction exemption are rigorous. According to an advisory brief issued by the Department of Labor last April, advisors must, among other things:

  • disclose material conflicts of interest,

  • make “prudent” recommendations,

  • act with undivided loyalty to the investor,

  • charge no more than reasonable compensation,

  • avoid making misleading statements about investment transactions and other relevant matters, and

  • document and disclose the specific reasons why any rollover recommendation is in the investor’s best interest.

The new exemption requirements also require specific changes by financial institutions. For example, according to the Department of Labor, financial institutions must “identify and carefully focus on the conflicts of interest associated with their business model and practices that create incentives for the financial institution or investment professional to place their interests ahead of the retirement investor’s interest.…Accordingly, financial institutions must be careful not to use quotas, bonuses, prizes, or performance standards as incentives that a reasonable person would conclude are likely to encourage investment professionals to make recommendations that are not in retirement investors’ best interest.”

These new rules were enacted in February, but enforcement is slated to begin in December. Given the nature of these changes, it may be that some firms and advisors simply pull out of the rollover business because they are unwilling to meet the higher standards of fiduciary care. In any case, you should benefit as advisors will be required to be more rigorous in their evaluation of what is in your best interest.

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have about investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to