It's perhaps the most important inflection point of a client's financial life and one of the most lucrative for an investment adviser or broker — and with millions of baby boomers heading into their golden years of retirement, IRA rollovers are happening frequently.
Yet the moment is fraught with danger for advisers and investors today because of a lack of clear regulatory directives on what advisers should suggest clients do with that old company 401(k).
Advisers certainly aren't avoiding rollovers. There's too much money at stake. But at the forefront of their thoughts — or at the very least in the back of their minds — is a nagging question: How can I provide rollover guidance and manage to stay compliant in the midst of a regulatory void?
"It's this very gray area right now," said Elizabeth Miller, president of Summit Place Financial. "You're either doing what you've always done, ignoring that there may be any change to the rules, or you're trying to adapt to the uncertainty by taking steps to ensure you'll be covered whatever the rule change might be."
A patchwork of fixes is underway at advisory firms around the country. Advisers are assessing the risks and considering how to best meet any potential eventuality in regulation that could affect their recommendations about moving money from workplace retirement plans to individual retirement accounts.
Why the confusion?
The Department of Labor's fiduciary rule that focused on retirement accounts died in the 5th U.S. Circuit Court of Appeals earlier this year. The Securities and Exchange Commission's advice-reform proposal includes a Regulation Best Interest that mentions rollovers in a preamble but not explicitly in the rule's text. And because that measure is in the proposal stage, it could change significantly. The Financial Industry Regulatory Authority Inc. outlines for brokers rollover factors they should consider but does not provide a clear roadmap.
This miasma is especially concerning given that the SEC and Finra have made rollovers a top exam priority for the last several years. In 2015, the SEC launched what it calls the ReTIRE Initiative, which evaluates the reasons for a rollover recommendation, conflicts of interest, supervisory controls, marketing and disclosures.
Advisers, trying to satisfy regulators' unspecified demands, have had some cautious — bordering on strange — interactions with clients over the matter of rollovers. Ms. Miller, for instance, sometimes gets a quizzical look from clients when she tells them something basic about investment advice: They must pay her for it.
She insists they read and sign a four-page document that explains she will earn a fee for managing the assets they roll out of their company retirement plan and into an IRA with her. The written acknowledgement of a cost they didn't incur in their 401(k) is an extra step Ms. Miller added to the process to ensure she is covering all bases.
"There's a little bit of, 'Really?'" from clients, she said. "It feels like an extra, sometimes awkward moment."
Baby Boomer demand
The regulatory fog is settling in at the same time that more and more clients are turning to their advisers for financial planning help with their retirement.
"We are in the midst of a virtual tsunami of assets moving from the qualified-plan universe, where people are protected by [federal retirement law] fiduciary standards, into the IRA universe, where they're not," said Phyllis Borzi, former assistant secretary of Labor who was the driving force behind the DOL fiduciary rule. "That rollover moment is a moment when investors are quite vulnerable."
So what's a financial adviser to do? For now, make their own way in a murky atmosphere.
Weston Burnett, president and chief executive of Optifour Integrated Wealth Management, said his firm uses a matrix in which it does side-by-side comparisons of a client's current retirement plan and the rollover IRA the firm would manage. It delivers that report to the client.
"I want them to walk away with something in writing that explains why it's in their best interest to move that retirement account," Mr. Burnett said.
The advisory firm Moisand Fitzgerald Tomayo uses a one-and-a-half page checklist as its advisers talk to clients about the pros and cons of a rollover. It's part of the fiduciary process, said Charles Fitzgerald, principal at the firm.
"We're choosing to take the higher road in terms of standard of care with our clients," he said. "The DOL rule never felt like a threat to us."
The Labor Department's fiduciary rule turned many advisers into archivers.
"One thing that came out of preparing to implement the DOL rule is increasing the comprehensiveness of the notes on the advice you give with respect to the rollover decision," said Chris Draughon, director of financial planning at First Coast Wealth Advisors.
One thing is universally acknowledged: The days of immediately executing a rollover when a client changes jobs are over. There's a lot more thought put into that decision now.
"I am saying now: Let's look at that 401(k)," Ms. Miller said. "We may want to leave the assets there, even though you're [leaving] employment."
She has instituted an internal worksheet used to analyze the costs and investments of the client's current retirement program.
The centerpiece of the late DOL fiduciary rule, the best-interest-contract exemption, required advisers to document why they recommended a rollover. The BICE said advisers must take into account fees and expenses associated with both the 401(k) and IRA, and the differing services and investment options available under each.
Even though the DOL rule has died, it still provides the best route for doing rollovers, according to Fred Reish, a partner at Drinker Biddle & Reath.
"Can you do less? That's where it gets gray," he said. "Nobody really knows."
For now, there may be less pressure on advisers to be fastidious about rollovers because despite recent market volatility, stock indexes are flat on the year. But if stocks plummet — taking retirement savings with them — clients may start to second-guess their rollover decisions.
"If advisers [follow] the vacated BICE, they can reduce risk to about nothing," Mr. Reish said. "But if they take shortcuts, then there is risk that they will have breached their duty of care and would be liable for losses."
In order to satisfy the BICE, advisers not only had to document the reasoning for their rollover recommendation on their end, they were required to make diligent efforts to obtain information on the client's current retirement plan.
That step has been a challenge for Sam Huszczo, owner of SHG Wealth Management. Many of his clients in the Detroit area work for automakers who have proprietary 401(k) plans and don't release information to outside advisers about the investments that comprise them.
Difficult to compare
"Sometimes when a rollover from a 401(k) to an IRA is in the client's best interest we have a difficult time being able to illustrate that in writing if we cannot obtain the information from the 401(k) provider," Mr. Huszczo said. "We have to have a standardized way to go about it from a compliance standpoint."
But unlike Mr. Huszczo and the other advisers interviewed in this story, Ms. Borzi said too many are being lax about rollovers and may eventually pay for it.
"I don't think the legal standards that apply in the aftermath of the 5th Circuit are entirely clear," she said. "I suggest that [advisers] tread a little more carefully than some of them appear to be doing in terms of making sure the principles that are applicable in the rollover context, the fiduciary principles, are observed."
The DOL continues to live on for Michael Kim, executive vice president and chief client officer for AssetMark, an asset management platform with some 250,000 accounts, 60% of which are retirement plans.
He has worked with the approximately 300 broker-dealers on the platform to implement BICE requirements, such as identifying, disclosing and mitigating conflicts of interest and evaluating the differences between 401(k) plans and IRAs in terms of investments, services and fees.
The effort makes sense because he foresees many of the same themes emerging again in the SEC proposal.
"The more things change, the more things stay the same," Mr. Kim said. "Those rules that we thought we were going to get out of may come back to be the norm under the SEC rule."
But that point is debatable.
"Right now, Regulation Best Interest doesn't clearly apply to rollover recommendations," said Barbara Roper, director of investor protection at the Consumer Federation of America.
That's a primary weakness of the proposal, according Aron Szapiro, director of policy research at Morningstar Inc.
"It's a unique conflict," he said. "It can't just be mentioned in the preamble as something that needs to be solved with a best-interest recommendation. There needs to be definition around what those requirements are to ensure that it's in the client's best interest."
Until the SEC issues a final rule — most expect it by the middle of next year — advisers will have to continue to do rollovers without explicit standards from regulators.
James Knaus, financial planner at Global Wealth Advisors, said he is comfortable in the fog of uncertainty.
"It doesn't bother us that we might be under increased scrutiny when we make a recommendation for an IRA rollover," he said.
His firm finds out everything it can about clients' financial backgrounds, compares the benefits of their current retirement plan with an IRA, discloses and discusses their fee for managing retirement assets, and puts the rollover in the context of a comprehensive financial plan.
"We simply need to be careful, as always," Mr. Knaus said.