3 Reasons to Avoid an IRA Rollover
Ahead of the DOL’s final fiduciary rulemaking, advisors need to brush up on when a rollover is not in a client’s best interest
From: thinkadvisor.com
The Department of Labor recently announced it will extend the comment period on its fiduciary rule proposal by 15 days, and it’s not clear when a final rule will be issued. In the meantime, advisors should consider the value they bring their clients.
“We’ve been watching [the DOL’s fiduciary rule proposal] very closely and it’s our view that advisors ought to start at least thinking about this proposed regulation now, even though it has yet to play out,” Matt Sommer, vice president and director of retirement strategy for Janus Capital, told ThinkAdvisor on Tuesday.
Sommer said that the industry has been “hyperfocused on the issue of advice in IRAs and variable compensation and the need to get a best interest contract exemption” but that “soliciting a rollover from a plan into an IRA” hasn’t been given enough attention. “That in and of itself according to the proposed regulation is a fiduciary act,” he said. “Regardless of how this all plays out, even for fee-only advisors and fee-only product providers, the act of telling someone they ought to consider moving their money out of an employer plan into an IRA is part of this potential rule change.”
Sommer noted that now is a good time for advisors to “not only retool and refine their value proposition, but also brush up a little bit on some of the more technical aspects of rollovers [and] when it may be in a participant’s best interest to simply stay put.”
Here are three such cases:
1. Participants who are 55 or older when they leave their jobs can waive the 10% penalty on early distributions. “Clearly a plan participant who qualifies for the 10% penalty exception and who needs liquidity really ought to leave at least a portion of their money behind in the qualified plan,” Sommer said.
2. Participants who own company stock in their 401(k) may also consider leaving money in the plan if the cost basis is low to take advantage of net unrealized appreciation. “The stock is distributed from the plan. The participant recognizes ordinary income based on the cost basis, and when they sell the stock, all the appreciation above the cost basis is a long-term capital gain,” Sommer explained.
He added, “The fact that they can turn all that appreciation into a more favorable capital gain, versus rolling the stock into an IRA and taking the distribution and paying ordinary income tax, may be another reason to forgo the IRA.”
3. Participants in a large or mega retirement plan may also be getting a much better deal on fees than they could get in an IRA. “The plan has economies of scale, and I’m sure their employer has done a good job negotiating with their 401(k) service provider,” Sommer said. “If that person rolls out of that plan to an IRA, it’s going to be very difficult for that IRA to be able to match those fees.”
That’s not necessarily a bad thing, he said. However, “if the IRA is a little more expensive, […] what is it exactly that the participant is receiving for those higher fees they’re going to incur?”
