IRA Rollovers: Finding the Right Fit

July 24, 2014 6:30 PM
By Brian Dobbis

An IRA rollover can offer potential benefits to many plan participants, but advisors must be sure it is the best option for a client before recommending one.


Numerous announcements from agency officials, and a smattering of lawsuits brought by disgruntled participants who feel misled, have made it clear that IRA rollover activity will continue to receive greater regulatory scrutiny from agencies such as the Government Accountability Office (GAO), the Financial Industry Regulatory Authority (FINRA), and the Department of Labor (DOL).

Behind the increased oversight is the ever-growing number of rollovers each year—$324 billion in 2013 alone1—particularly as baby boomers approach retirement and leave their employer-sponsored plans.

Regulators want to be sure that financial advisors are “fair and balanced” when analyzing plan participants’ options with regard to their 401(k) assets. It’s a reasonable concern, given that some options, including rolling over into an IRA, are more lucrative to financial advisors than others, which could present a potential conflict of interest. Regulators are challenging those of us in the industry to give participants all rollover options, including the choice of leaving the assets in the current 401(k), if that is determined to be in the clients’ best interest.

“A recommendation to roll over plan assets to an IRA rather than keeping assets in a previous employer’s plan or rollover to a new employer’s plan should reflect consideration of various factors, the importance of which will depend on an investor’s individual needs and circumstances, according to FINRA Regulatory Notice 13-45 (“Rollovers to Individual Retirement Accounts”), which serves as a guiding document to advisors in the rollover business.

While IRA rollovers are generally a prudent course of action, there are situations in which they are not the optimum choice.  Based on guidance from FINRA, the following factors are among those that should be taken into consideration when analyzing whether an IRA rollover is a suitable strategy for a client:

  • Investment options—Consider the menu of investment options and share classes offered in each of the available scenarios: staying in the current employer’s plan, moving to a new employer’s plan, or rolling over to an IRA. Factors such as performance, diversification, and costs should be weighed for each option.
  • Fees/costs/services—What fees and costs are participants currently paying, and what would they pay under different scenarios? What services are they receiving for the associated costs? Services may include investment advice, plan education, and one-on-one meetings. Are costs reasonable for the services being provided and is the participant using the services offered? In the past, it was challenging to determine plan costs, but fees have become more transparent with recent disclosure regulations under ERISA §404(a)(5).
  • Bankruptcy/creditor protection—Generally, both 401(k) and IRA accounts are protected from creditors in a bankruptcy proceeding.  However, IRA accounts may be vulnerable to creditors if an individual is not in bankruptcy, whereas 401(k) plans are protected.
  • Required minimum distributions (RMDs)—For participants working past 70½, an IRA may not be prudent. Assuming that they own less than 5% of a company, 401(k) participants working past 70½ can delay their RMD until they retire. IRA participants, on the other hand, must start taking RMDs at 70½, regardless of work status, according to the IRS. (Note: A participant who owns 5% or more of the business sponsoring the 401(k) is required to take minimum distributions at 70½, regardless of whether they continue working.)
  • Withdrawing before age 59½—In general, 401(k) participants are not assessed a 10% penalty on early withdrawals as long as the withdrawal occurs when they leave the company in the year they turn 55 or older. Special penalty relief applies only to 401(k) participants between 55 and 59½ who take a withdrawal after leaving the company. This relief does not extend to IRAs. IRA distributions typically are subject to penalties until the participant reaches 59½.
  • Government workers in 457(b) plans—Distributions from 457(b) plans are not subject to the 10% early-withdrawal penalty, even if the participant is younger than  59½ at the time of withdrawal. However, this relief does not extend to IRAs, and a distribution taken from a rollover IRA before 59½ would be subject to the early-withdrawal penalty.
  • Does the retirement plan include employer stock?—Company stock that has significantly appreciated within an employer retirement plan may be eligible for special tax treatment using net unrealized appreciation (NUA), if the participant takes possession of the shares. Participants stand to lose favorable NUA treatment if they move that company stock into an IRA.  

This is not an exhaustive list, but it provides a glimpse of how nuanced the subject can be, as is true with most facets of the investment industry. I always urge advisors to become familiar with the tax implications of various retirement vehicles and recommend that they develop a good relationship with their compliance officer, who can be invaluable. Forming a network of tax, accounting, and investment authorities also can be helpful.

Some of the ways I have heard advisors are responding to regulatory requirements include:

Which practices and policies have you found useful to respond to regulatory requirements?


1 Cerulli Associates.


Brian Dobbis, QPFC, QPA, QKA, TGPC serves as Lord Abbett’s IRA Product Manager.

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the most enjoyable aspect of your website comments is that I always learn something new....

bob h.
I always take the time to read your articles...they are informative and helpful to my business. Thanks.
That’s great to hear, Bob. I welcome feedback from all readers. The blog is designed to spark thought and conversation, so please let me know what other retirement topics and issues you’d like me to explore.
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