Finra warns against conflicts in retirement-plan rollovers

Pitch for IRA money must give 'fair and balanced' information about other options, regulator says

By Mark Schoeff Jr.

Dec 30, 2013 @ 4:32 pm (Updated 8:48 pm) EST

finra, retirement, 401(k), rollover, retirement plan, conflict of interest

Finra signaled on Monday that it will crack down on potential conflicts of interest that could affect brokers when they roll over a client's company retirement plan into an individual retirement account.

In a regulatory notice, the Financial Industry Regulatory Authority Inc. warned member firms that they should not recommend that a client who is leaving a company transfer money from the company's 401(k) plan into an IRA if it's better for the client to leave the money in the company plan, or transfer it to his or her new employer's plan.

Brokerage firms have an economic incentive to roll over retirement assets into IRAs that are sold by the brokers, Finra said. Rollover work — as well as the marketing of IRA services — involves securities transactions subject to Finra rules.

“Any recommendation to sell, purchase or hold securities must be suitable for the customer and the information that investors receive must be fair, balanced and not misleading,” the Finra regulatory notice stated. “Firms should emphasize that performance of the suitability responsibilities of a broker-dealer or registered representatives should never be compromised by their financial interest in recommending an IRA rollover or another action.”

The notice underscores Finra's role in rollover policing, an increasingly popular area of regulation, as more and more workers build their retirement nest eggs through 401(k) plans and IRAs. IRAs account for about $5.4 trillion of the $19.5 trillion retirement-asset market at the end of 2012, according to the Investment Company Institute.

The Department of Labor is poised to re-propose a rule next August that would apply a fiduciary duty to a wider array of advisers to retirement accounts, including brokers who sell IRAs. Observers expect the rule to address rollovers.

Finra told brokerages they must ensure that they're training their registered representatives to understand the tax, fee and investment implications of a rollover and to determine whether it fits their client's financial needs and objectives.

Brokers must be careful in how they pitch IRAs, according to Finra.

“Whether in written sales material or an oral marketing campaign, it would be false and misleading to imply that a retiree's only choice, or only sound choice, is to roll over her plan assets to an IRA sponsored by the broker-dealer,” the Finra regulatory notice states. “The marketing of the IRA rollover services offered by the broker-dealer must be balanced by a discussion of other available options and how they compare to the IRA offered, particularly with regard to fees.”

Finra told brokers that provide educational information to 401(k) plan participants to monitor those activities to make sure that they don't cross the line into IRA sales recommendations.