Years of low-growth markets, combined with numerous geopolitical events, have kept advisers busy enough to be excused for missing a number of important developments that affect individual retirement accounts.
In recent years, federal regulatory bodies have placed IRAs generally, and rollovers specifically, under increased scrutiny. These developments have direct bearing on taxable events, risk, allocation/portfolio construction, reporting and distribution of assets for baby boomers approaching retirement.
The cascade of rule making has also brought attention to the nature of communication between financial professionals and investors about retirement savings options, and created some anxiety among advisers about the processes they use to consolidate retirement assets. Now is the time to reset the bar on how you communicate with investors about IRAs and how you document those communications. It's also time to consider what's on the regulatory horizon.
Next year should see continued growth in rollovers, owing to the transition from a defined-benefit to a defined-contribution system and the growing number of Americans entering retirement. Over the past 15 months, the focus on IRAs by U.S. government bodies has intensified. A principal catalyst was a 2013 report from the Government Accountability Office, which urged the Labor Department and the Internal Revenue Service to improve the rollover process for participants.
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The GAO report argued that plan participants contemplating retirement distributions are in need of greater disclosure with regard to their options. It was followed by an almost unprecedented blizzard of actions directly affecting advisers and retirement assets:
Finra. In January, the Financial Industry Regulatory Authority Inc. released its examination priorities for 2014, including practices related to adviser recommendations that clients roll over assets from employer-sponsored retirement plans to IRAs. The announcement followed Finra Regulatory Notice 13-45, which reminded broker-dealers and advisers of their rollover responsibilities. You should expect examiners to focus not just on recommendations, but also the quality of investor education, disclosures, supervision and training.
SEC. Shortly after the Finra announcement, the Securities and Exchange Commission released its own examination priorities, focusing on the nature and substance of investor communications related to IRA rollovers.
IRS. Following the Tax Court case Bobrow v. Commissioner, starting next year the IRS will restrict investors to one indirect IRA rollover in any 12-month period. Additionally, IRS Notice 2014-54 allows pretax money to be applied directly to a rollover IRA or another qualified plan, while after-tax funds can be distributed directly to a Roth IRA. Notice 2014-54 applies to distributions from 401(k), 403(b) and 457 plans — not to IRAs, SEP or Simple IRAs.
Supreme Court. The Supreme Court issued a decision that may affect the ability to protect assets in an inherited IRA from creditors. In Clark v. Rameker, the court held that such assets are not exempt from the estate in a bankruptcy proceeding. This ruling has creditor protection and estate planning considerations, especially for inheriting spouses.
So how should you react to this torrent of regulatory and legal action?
There is no need to retrench, be fearful of or shy away from IRA business. IRAs remain important to the U.S. retirement system and represent an important business development opportunity for your firm.
Greater awareness of the rules regarding potential rollovers — and closer attention to the procedures around them — will enable you to continue to serve your clients confidently.
The Finra ruling did not address IRA documentation, or how or what you should track. Given this uncertainty, it's best to err on the side of more documentation. This may include more diligent tracking and recording of the process, greater attention to education and training, and inquiring about the source of rollovers.
You might also consider requiring signed waivers from investors, positioning yourself as a source of options from which the investor has freely chosen, rather than a provider of specific IRA recommendations. Finally, checklists and decision tools can help ensure that you are operating according to repeatable procedures and asking the right questions.
Robert Cirrotti is head of retirement solutions at Pershing, a BNY Mellon Corp. company.