Finra cautioned investors Thursday that they may face increased fees and expenses when they transfer retirement savings from a company plan to an individual retirement account.
“Even if there are no costs associated with a rollover itself, there will almost certainly be costs related to account administration, investment management or both,” the alert states. “Don't roll over your retirement funds solely based on the word 'free.'”
Finra also pointed out that financial advisers can earn commissions and fees from rollover decisions, potentially diminishing the return that investors get from their retirement accounts.
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“In contrast, leaving assets in your old employer's plan or rolling the assets to a plan sponsored by your new employer likely results in little or no compensation for a financial professional,” the alert states. “In short, even if the recommendation is sound, any financial professional who recommends you move money from an employer-sponsored retirement plan into an IRA could benefit financially from that move.”
The alert marks the third time that the brokerage industry self-regulator has addressed rollovers in the past month. Finra issued a regulatory notice Dec. 30 and included rollovers on its list of examination priorities Jan. 2.
Other regulators also are getting in on the rollover action. The Securities and Exchange Commission included the topic on its examination priority list, and the Labor Department may include the issue in a pending regulation that would expand fiduciary requirements for retirement savings advice.
“Workers and retirees should understand that in many cases, they don't have to act immediately upon switching jobs or retiring,” Gerri Walsh, Finra senior vice president for investor education, said in a statement. “Taking the time to compare costs and investment options can help you keep your nest egg from suffering unnecessary cracks.”
An adviser whose business concentrates on 401(k) plans said that the rules surrounding transparency and disclosure for those vehicles are tighter than they are for IRAs.
“In most cases, there seems to be more oversight of a retirement plan to that of an IRA,” said Gary Josephs, managing principal of the Retirement Benefits Group. “I think Finra is trying to increase the oversight of the IRA, and in that regard, I applaud their direction.”
Although Mr. Josephs welcomes the rollover guidance from Finra, he doesn't want the regulator to go too far.
“What I don't want to see them do is tell participants what they can and can't do as long as it's within the law and in the participant's interest,” he said.
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.
A survey by the Employee Benefit Research Institute in May showed that rollovers account for 13 times more money added to IRAs than contributions.
Jason Hochstadt, chief executive of Jedi Management, an investment advisory firm, supports reviewing IRA rollovers but said that potential increased expenses should be put in context.
“You have to go through the details in terms of the service being rendered, the advice and the costs,” he said. “You have to factor in not just costs but the quality of the relationship.”
Mr. Josephs expressed a similar concern.
“Too often in our industry [regulation] is all about the costs,” he said. “It's never about the quality.”
Mr. Hochstadt questioned why concern about retirement savings vehicles is being elevated above other investment accounts.
“It seems as if retirement accounts are getting put on a different level,” he said. “It's almost as if advisers will feel guilty and have to prove their innocence.”