10 important client considerations with 401(k) rollovers

Advisers need to make sure they understand where clients are coming from and how this decision will impact their retirement security.

A tremendous amount of money flows from 401(k)s to IRAs every year through rollovers as individuals retire, switch jobs or just consolidate their wealth. Financial advisers are eager to serve this marketplace due to the opportunity involved. We know that the Department of Labor is clearly concerned about these transactions, as shown by recent regulatory actions. But do we understand how consumers look at this decision? Is the decision important to them? What factors do they consider in making their decisions?

A recent survey report released by The American College of Financial Services provides some useful insight into client behavior during a rollover. The “Defined Contribution Rollover Survey” asked recent retirees who retired with at least $75,000 in their last employer’s 401(k) plan about what they did with their savings upon retirement. Below are 10 highlights from the research that all advisers should know.

1. A majority of retirees roll over the 401(k) to an IRA at retirement.
At retirement, 62% of respondents rolled over their 401(k) to an IRA. However, about 38% kept their money in the 401(k) at least initially at retirement. It is likely that more of these individuals will also roll over later on. Additionally, clients were more likely to do a rollover if they had a financial adviser.

2. Clients view the rollover decision as an important retirement decision.
Roughly 96% of respondents stated that the decision to roll over or keep their money in their 401(k) was viewed as an important decision for their retirement security. Recognize that this is a big decision for many clients and is an important part of their retirement planning.

3. The rollover decision can be a stressful one.
The rollover decision attributed to increased anxiety for 42% of respondents. Clients view the decision as important and can stress over moving their life savings from one plan to another, so make sure as an adviser you reassure them throughout the process. Some of the stress may relate to the complexity of the paperwork involved, which an advisor can help demystify.

4. Clients feel confident after the rollover decision is made.
Ninety-seven percent of respondents were satisfied with their decision to roll over or leave the money in their 401(k). Furthermore, 92% stated that they would make the same decision if they could go back and do it again. There is not a lot of buyer’s remorse with regards to doing rollovers, despite some concern before the decision is final.

5. Clients want convenience with their rollover decision.
More than 70% of those who rolled over their 401(k) account to an IRA stated that convenience was a major factor in their decision. While convenience might not seem like the sexiest aspect of a rollover to a financial adviser, it is very important to consumers.

6. Clients want good investment performance.
Of those who rolled money over, 88% believed they would get better performance after the rollover. There is a real perception by individuals that the new investment options outside the 401(k) will provide better returns than those inside the 401(k).

7. A financial adviser will be consulted as part of the rollover decision.
Eighty-three percent of respondents consulted a financial adviser while making the decision to roll over a 401(k) or to leave it alone. This highlights the point that most people will have developed some relationship with a financial adviser before they retire, so if you want to get to these potential clients you need to do it before they retire.

8. Clients expect advisers to fill in the planning gaps.
Eighty percent of respondents stated that advisers could add value to their retirement planning by identifying gaps in their overall plan. Many respondents showed high levels of confidence about their own abilities to manage investments and make financial decisions but still think advisers have value, predominately in putting together and reviewing the overall plan.

9. Clients update their plans as they go.
Seventy percent of respondents stated that they had updated their retirement plan within the first three years of retirement. While many people go into retirement with a set retirement plan, that plan is likely to change and be modified along the way.

10. The rollover decision was part of a comprehensive plan.
Respondents were not making the rollover decision in isolation. In fact, 90% of respondents reported having a plan for where their income would come from in retirement. Even for those who did not roll over their money, they also reported having a plan in place.

UNDERSTAND WHERE CLIENTS ARE COMING FROM

If you are helping clients with rollovers, make sure you understand where they are coming from and how this decision will impact their retirement security. A rollover might feel routine to you, but remember that this is a very important decision for that individual client and they might even be experiencing heightened levels of anxiety over the decision. As an adviser, you can make sure the client is making the right decision, assure them of the benefits of a rollover to their plan and identify any other planning gaps that they might have in their overall plan.

Jamie Hopkins is a professor of tax at the American College’s Retirement Income Certified Professional program. Follow him on Twitter @RetirementRisks.