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This New Rule Will Bring a Big Change to Your Retirement Plan Rollover


Billions of dollars are moved annually from 401(k) plans to IRAs. And starting in July, the U.S. Department of Labor (DOL) will mandate that all financial advisors and brokers comply with a higher fiduciary standard for retirement plan rollovers. Under the new DOL rule, all financial institutions and investment professionals must explain in writing why they are recommending a rollover and how it serves the best interests of their clients. Let’s break down how this higher fiduciary standard will change retirement plan rollovers.

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How Will the New DOL Rule Affect Rollovers?

The new DOL rule, which takes effect on July 1, sets a higher fiduciary standard for retirement plan rollovers. While the current law allows fiduciaries to take third party payments for rollovers as long as they serve their client’s best interests, the Biden administration will now mandate both financial institutions and investment professionals to document why and how this recommendation serves that interest.

In doing so, the DOL asks fiduciaries to consider relevant factors, including:

  • other alternatives before rolling over employee benefit plan assets to an IRA
  • fees and expenses associated with both the plan and the IRA
  • whether the employer pays for some or all of the plan’s expenses
  • different levels of services and investments for both the plan and the IRA

In December 2020, a Department of Labor rule approved at the end of the Trump administration exempted fiduciaries from the Employee Retirement Income Security Act (ERISA), which allowed them to get third-party payments for recommending retirement plan rollovers.

Under ERISA, the federal government had identified the minimum standards for retirement and healthcare plans in the private sector. According to the DOL website, the 1974 law requires plans to:

  • provide participants with information about features and funding
  • provide fiduciary responsibilities for those who manage and control plan assets
  • establish a grievance and appeals process for participants to get benefits from plans
  • give participants the right to sue for benefits and breaches of fiduciary duty

These requirements generally align with a financial advisor’s fiduciary duty, which compels the advisor or firm to act in the best interests of an individual or an institution. Duties include getting the best prices and terms for clients, providing all relevant facts, disclosing potential conflicts of interest, and offering accurate and thorough advice.

But keeping the current exemptions from ERISA in mind, the DOL has made retirement plan rollovers a priority to safeguard against strong economic incentives that could pose conflicts of interest for the retirement needs and goals of clients.

“This requirement reflects the Department’s view that parties wishing to take advantage of the broad prohibited transaction relief in the new exemption should make a conscious up-front determination that they are acting as fiduciaries; tell their retirement investor customers that they are rendering advice as fiduciaries; and, based on their decision to act as fiduciaries, implement and follow the exemption’s conditions,” the DOL said in a statement dated from April 2021.

For reference, the 2021 Investment Company Fact Book says that $534 billion were rolled over from retirement plans to IRAs in tax year 2018. This is nearly eight times more than the $70 billion made in new contributions that same year.

3 Reasons Not to Roll Over Your Retirement Plan

SmartAsset: New Fiduciary Rule for Retirement Plan Rollovers

Before rolling over your assets from a 401(k) into an IRA, you should consider your options carefully.

One of the biggest advantages that a 401(k) has over an IRA is that an employer can match contributions. This program can boost your retirement savings significantly with minimum effort.

A 2021 study from Vanguard says that roughly one-third of Americans using 401(k) plans are saving below employer matches. This means that they are essentially leaving free money on the table. Though you should note that not all jobs offer matching programs. So eligibility depends entirely on your employer.

If you have a 401(k) plan, you may also want to think about loans or creditors. Depending on your financial needs, these two factors — beyond the employer match consideration — could influence your rollover decision:

  • Participants can borrow money against 401(k)s but cannot borrow against IRAs
  • 401(k) assets are typically protected from creditors; IRA assets may only be protected in case of bankruptcy

3 Reasons to Roll Over Your Retirement Plan

For many people, rolling their 401(k) plan into an IRA can be a good choice. Keeping financial needs, investment goals and risk tolerance in mind, here are three reasons when a retirement plan rollover could make sense for you:

  • Better investment choices. While 401(k)s have limited choices, commonly invested in target-date funds, IRAs will allow you to diversify your asset selection with stocks, bonds and other financial investments.
  • Consolidation. If you have multiple 401(k)s from different jobs, you may want to roll everything into one account. Transferring money from multiple 401(k)s into one IRA could potentially save you money with lower administrative costs. Depending on the 401(k) account, fund expenses, trade fees and annual percentages can add up even when you are no longer contributing. So it’s important to do the math to see which option will cost you less.
  • No required minimum distributions. When you reach age 72 (or 70.5 if you were born before July 1, 1949), most retirement plans will mandate annual RMDs. However, if you roll over your 401(k) into a Roth IRA, your money can continue growing in the account during your lifetime. You should note that you will have to pay income taxes on the money that you roll over that tax year, but you will not owe taxes on withdrawals after retirement.

Bottom Line

SmartAsset: New Fiduciary Rule for Retirement Plan Rollovers

Both financial institutions and investment professionals could have strong economic incentives to roll over ERISA-protected plans into affiliated IRAs. Retirement plan rollovers move billions of dollars annually. And while the DOL is taking steps to create a higher fiduciary standard to protect against bad financial advice, moving assets from a 401(k) to an IRA is an important financial decision that will impact the future of your retirement.

The DOL says that it “anticipates taking further regulatory and sub-regulatory actions” that include amending “investment advice fiduciary regulation” and “amending or revoking some of the other existing class exemptions available to investment advice fiduciaries.”

Retirement Planning Tips

  • A financial advisor can help you put a financial plan in action for your retirement. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Fidelity says your retirement savings should cover 45% of your pretax, pre-retirement income, with Social Security benefits making up the rest. SmartAsset’s retirement calculator can help you estimate how much you’ll have saved by the time you’re ready to retire.
  • If you’re looking for money outside of your pension or retirement plan, here are five additional ways to get guaranteed retirement income.

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