Finra cautions investors to be careful with IRA rollovers, notes that adviser fees can hurt returns

Don't move funds based solely on the word 'free,' regulator says

Jan 23, 2014 @ 12:33 pm

By Mark Schoeff Jr.

+ Zoom
(Bloomberg)

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.

In an investor alert, the Financial Industry Regulatory Authority Inc. debunked claims that IRA rollovers can be cost-free.

“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.

(Don't miss: 10 tips for a worry-free IRA rollover)

“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.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Aug 01

Webcast

An Adviser's Guide to Developing NextGen Talent

As the registered investment advisory business matures, it's clear we need to focus on a new generation of talent.Research from InvestmentNews shows that firms of seven or more full-time individuals employing at least one NextGen... Learn more

Featured video

Events

How to effectively engage and serve female clients

It is clear building relationships with women is a proven way to grow your business. Heather Ettinger of Fairport Asset Management explains proven segmentation strategies.

Latest news & opinion

Sen. Gary Peters brings broker background to work every day on Capitol Hill

Michigan Democrat resists ripping up DOL fiduciary rule but would be open to some changes.

DOL fiduciary rule causing DC-plan record keepers to change business with insurance agents

Principal has communicated that independent agents must change their business models to keep receiving compensation.

DOL fiduciary rule opponents want to push implementation back until 2019

ICI, Chamber of Commerce among groups asking for delay, while Democratic lawmakers call on DOL to keep to its earlier planned schedule of Jan. 1, 2018.

Take 5: Vanguard's new CIO Greg Davis talks bonds, stocks and costs

Having just stepped into the role, this veteran of the firm now oversees $3.8 trillion in assets in more than 300 mutual funds and exchange-traded funds.

Tech companies deploy behavioral finance tools for advisers

They seek to turn knowing more about clients into growing more revenue.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print