Navigating 401(k) rollovers

For plan advisers, providing guidance to employees on transfers can prove hazardous

Mar 2, 2014 @ 12:01 am

By Mark Schoeff Jr.

For investment advisers, providing guidance to retirement plan participants about moving money from an employer-sponsored plan to other investment vehicles is like swimming in murky waters.

What lurks below may bite you, or you may paddle along unscathed. Such transactions aren't prohibited, but the Labor Department is trying to tighten rules surrounding them.

In an advisory opinion issued in 2005, the DOL said that an adviser not connected to a plan can recommend that a participant roll over plan funds to an individual retirement account he or she manages without triggering fiduciary-duty rules under the Employee Retirement Income Security Act of 1974.

The situation is more complicated when an adviser works for a plan.

“If a fiduciary exercises control over plan assets to cause the participant to take a distribution and then to invest the proceeds in an IRA account managed by the fiduciary, the fiduciary may be using plan assets in his or her own interest, in violation of ERISA,” the DOL opinion stated.

In 2010, the DOL proposed a rule that would put more professionals working with retirement plans, including more financial advisers, under the “fiduciary” umbrella, including brokers selling IRAs. The measure was withdrawn after financial industry protest but is on the DOL regulatory calendar for re-proposal in August — and it is expected to address rollovers.


In recent weeks, both the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc., the industry-funded broker regulator, made rollovers an examination priority.

A report by the Government Accountability Office a year ago found that the rollover process favors distribution to IRAs and that plan provider call center representatives recommended that participants move assets to IRAs without exploring other options, such as transferring to a new employer's plan or keeping assets with a former employer.

The sheer size of the market has drawn regulators' attention. Assets in IRAs totaled $5.4 trillion in a total retirement market that hit $19.5 trillion at the end of 2012, according to the Investment Company Institute. Thirteen times as many assets were rolled over into IRAs as was money directly contributed in 2011, according to the Employee Benefits Research Institute.


Advisers to 401(k) plans could find themselves in various situations in which they might question what actions are appropriate and compliant.

For example, if an employee wants to transfer money out of a 401(k) and into an IRA while he or she is still working at a company, can the adviser help this employee?

Advisers should avoid this transaction, known as an in-service rollover, according to Jennifer Tanck, vice president for account management at Aspire Financial Services, a retirement plan record-keeping firm. It could be construed as a violation of the adviser's fiduciary duty to keep people in the plan.

“This is just setting up the adviser to be challenged at a later time as to whether it was in the best interests of the participant,” Ms. Tanck said.

Another scenario could involve a worker who has been laid off because his company is moving operations to Mexico. That worker might approach the plan adviser, whom he has gotten to know through the adviser's educational sessions.

“If individuals want to talk about the rollover, it's OK for the adviser essentially to help them make the decision,” said Robert Cirrotti, director of retirement solutions at Pershing.

He added that it's critical that the discussion move beyond an IRA and include alternatives for investing the transitioning assets.

“One of the best ways to begin a rollover discussion is not [to talk] about the rollover itself but [making it] more of a retirement income discussion,” Mr. Cirrotti said.

What if a plan adviser learns that a company he or she advises is laying off workers, and contacts those workers regarding rollovers?

Although it may not be strictly prohibited, Ms. Tanck recommends that 401(k) advisers refrain from pitching rollover business.

“I would much rather have the participant solicit the adviser than the other way around,” Ms. Tanck said.

And in most scenarios, it's key that comprehensive conversations include the range of potential fee and service differences between 401(k) plans and IRAs, and to document that the client wanted to transfer the assets.


“What you don't say can be just as important as what you say,” said Kevin Goodman, national associate director for the SEC's broker-dealer examination program. “You can't just accentuate the positives and ignore or diminish the negatives. You must discuss the pros and cons.”

Even a conversation that ends with someone staying put in a 401(k) or pension can be a win for an adviser adhering to fiduciary duty. John Hauserman, president of Retirement Quest Wealth Management, assesses whether a potential client would be a good steward of retirement money.

“Over time, some of the best things I did were not to take on a client — to recommend they keep the pension plan and not roll over into an IRA,” Mr. Hauserman said, giving the example of a person who would likely mismanage his or her retirement funds.

As regulators weigh in, the issue could get more complicated.

“The DOL is clearly expressing a view that individual assets are better served within the context of a 401(k) plan than an IRA,” Mr. Cirrotti said. “I don't think we will ever get to an absolute [ban on rollovers]. We will likely get to a place where the compensation for the adviser is leveled between the assets in the plan and the assets in the IRA.”

The SEC and Finra also are unlikely to seek a rollover ban.

“Finra and the SEC are looking for a methodical review [of the rollover decision],” said Clifford Kirsch, a partner at Sutherland Asbill & Brennan. “The concern they have is a one-size-fits-all approach.”


What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


5 tech innovations you can't afford to ignore

Technology innovation is always top of mind at Pershing. What does Pershing have on tap for 2018 and beyond.

Latest news & opinion

Mutual funds feel the pinch of platform fees

No-transaction-fee options are a big hit with investors, but funds wind up paying the costs — and passing them on.

Divorce reduces retirement readiness

The new tax law could increase financial challenges for divorced people, but planning opportunities abound.

Merrill Lynch fined $42 million for misleading customers

In addition to the practice of 'masking' trades, the wirehouse went to extremes to cover up the wrongdoing.

Advisers with billions in AUM leaving Wall Street

Merrill Lynch has seen two teams exit recently, each with more than $4 billion in client assets.

Wells Fargo weighs changes to wealth unit

The move would reflect the bank's effort to cut $4 billion in costs.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print