401(k) Rollovers – Caveat Emptor

When it comes to 401(k) rollovers, too often the term caveat emptor or let the buyer beware applies. These “toxic rollovers” are often done by financial advisors who seem to be looking at their own bottom line versus what is best for their clients.

By all reports we are on the eve of a tough new fiduciary standard from the Department of Labor that would eliminate many of these questionable rollovers. That said this rule has been in the works since at least 2009 when I started writing this blog so I will believe it when it happens. The financial services lobby has spent a lot of money opposing this rule so we will see what the final version looks like.

A questionable 401(k) rollover 

A colleague recently shared the story of a friend who was being advised by a registered rep to roll their 401(k) account into a variable annuity inside of an IRA upon leaving their job.

This was at best questionable advice. The annuity being pushed by the rep was very high cost, with high expense ratios on the investment sub-accounts plus mortality and expense charges that likely bring the internal costs to over two percent. Additionally, the annuity has an eight-year surrender period.

Besides the high expenses another question is why roll money from a 401(k) into an annuity inside of an IRA? Good question, I’ve never been a fan of this strategy I think it is redundant and adds little value. Other advisors, some of whom I have a good deal of respect for, do view this as a legitimate strategy beyond the high commissions and fees earned by the advisor. For readers who are financial advisors I welcome your thoughts on this topic in the comments section.

You should have serious concerns about any financial advisor who wants to roll your 401(k) to a high cost product such as an annuity, proprietary mutual funds from their employer or any number of investments that seemingly benefit them more than you. This is probably a relationship you want to terminate, or better yet, never start. At least get another opinion if your feel uncomfortable with what is being proposed. NEVER invest in anything or with anyone that you are uncomfortable with. 

Please check out 401(k) Rollovers – Buyer Beware where I discuss some additional questionable rollovers from 401(k) plans. 

The proposed fiduciary rule 

The Department of Labor’s proposed fiduciary rule would require financial advisors of all types who provide advice about any sort of retirement plan to act in a fiduciary capacity. This means they must provide advice that is in the best interest of their client. This differs from the less rigorous suitability standard currently used by broker-dealers and registered reps.

Needless to say major players in the brokerage world are for the most part vehemently opposed to this change. Notably so is financial guru Dave Ramsey. I wonder if this has anything to do with my understanding that the financial advisors affiliated with his network are largely commissioned brokers and registered reps and he stands to lose referral income under this new rule? 

According to the 401(k) Help Center site, “Under DOL’s proposed definition, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, plan participant, or IRA owner for consideration in making a retirement investment decision will now be a fiduciary — the suitability standard is out.”

Mostly I think the brokerage world opposes this rule because it threatens to put a crimp in the potential gravy train that is retirement plan rollovers from Baby Boomers. The statistics are staggering both in terms of the dollar value of these rollovers and the number of Boomers hitting retirement age every day. 

Your options when leaving your employer

When you leave a job, for whatever reason, there are four main options for your old 401(k) plan:

• You can leave your account in the plan.
• You can roll your balance over to a new employer’s plan if allowed and if applicable.
• You can roll your balance over to an IRA.
• You can take a distribution in cash.  This is often the least desirable as it will trigger taxes and in some cases penalties if you are under age 59 ½. However, there are more favorable options for those who leave their employer and are age 55 or older.

Check out Your Old 401(k) Take it or Leave It? where I discuss the first three at length.

The Bottom Line 

The decision to roll over your 401(k) is an important one. Sadly, the term caveat emptor too often applies. Don’t let yourself be swayed by a sales pitch by an advisor who is looking for a major payday by moving your money to investments that may benefit them more than you. Find a fee-only financial advisor who will act in your best interests and provide the unbiased guidance and advice that you deserve.

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