During the Department of Labor fiduciary debate, one of the biggest issues was the benefits and drawbacks of rolling 401(k) and other employer-sponsored retirement plans into individual retirement accounts. The government made the argument that many rollovers were unnecessary — and they didn't stop there. In some cases, they pointed out, people rolled from low-cost employer plans to much higher-cost IRAs. According to the government, the DOL rule had the potential to alleviate nearly $17 billion in extra fees.
Full disclosure: I was a proponent of the DOL fiduciary rule, and I still am. While it was flawed in many ways, I believe the intent was on point. Yes, it created some hardships, but the positives vastly outweighed the negatives.
Back to the issue at hand: rollovers. When I first started hearing about the focus on rollovers, I thought it was great news. Currently, advisers largely start from the standpoint that money should always be rolled over unless there is some issue or overt reason to leave it where it is. The DOL rule would have flipped that script, causing advisers to start with the presumption that the account should stay put, unless you could prove the benefit of moving it.
This is the better approach from an advice standpoint: Start with the status quo and make reasoned and educated decisions for why change should occur. If the new IRA would offer more investment options, lower fees and more access to your funds, a rollover could make sense. This switch in the process also could help advisers review their client's employer-sponsored retirement accounts more closely and help them document the reasons for such a recommendation.
Now for the bad news. If we start with the presumption that an account should be left where it is, will there be fewer rollovers? The answer is almost certainly yes. So why is this bad news? Perhaps due to narrow framing bias, which can trick investors into ignoring their total financial picture when making investment choices.
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One easy way to fall into this trap is to have too many retirement or investment accounts. By splitting money among a variety of accounts, an investor might only make decisions based on that particular account. This can cause investment allocation decisions to move out of line, and any attempt to diversify across assets to not really create diversification. For instance, the client might just diversify across multiple target-date funds in different accounts, thinking they are creating a broader level of diversification when in fact they could just be harming themselves.
As such, to help a client see their total retirement picture, avoid narrow framing and have a better understanding of their total investment allocation, there is a strong case for account consolidation. This also could help the conversation with clients stay focused on long-term goals and not just short-term goals. If we do plan to do a rollover in the future, we might maintain our view of the account as a short-term rather than long-term retirement vehicle.
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This is not to say that all 401(k)s, 403(b)s and pensions should be rolled into IRAs. The employer plan is still sometimes the best plan available, especially when the federal thrift savings plan is in the picture.
In this case, technology might defeat the need to do a rollover solely to avoid narrow framing bias. As aggregation software, such as tools from Orion and Quovo, allow advisers to pull a client's various investments into one portal, planning software, or experience, narrow framing could be overcome without having to do a rollover. Clients will be able to see their entire investment picture in one place thanks to aggregation technology.
Jamie Hopkins is director of retirement research and vice president of private client services at Carson Group.