A December 2018 Investment Company Institute (ICI) study clearly demonstrates the significance of IRAs and the common use of IRA rollovers in the construction of a personalized retirement plan asset strategy.
The ICI study also provides some insight on why investors chose to roll over their assets and whom they consulted to help them make the best choice for their financial situation. It is within this data we can see that advisors and financial services firms are often critical players in the rollover decision.
For example, financial advisors were by far and away the top information source across all age ranges for plan participants considering rolling over their assets.
Top 3 Sources Consulted for Information on Rollover Decision
Percentage of traditional IRA-owning households with rollovers by age, 2018 |
|||||
|
All |
Younger than 50 |
50–59 |
60–69 |
70 or older |
Professional Financial Advisor |
48 |
38 |
45 |
58 |
56 |
Financial Services Firm |
19 |
22 |
22 |
15 |
17 |
Employer |
12 |
12 |
15 |
11 |
9 |
Source: ICI, “The Role of IRAs in US Households’ Saving for Retirement, 2018”
Further, two of the top six primary reasons participants executed the rollover decision were because of advice received from a financial advisor or the desire to keep assets with a particular service provider.
Due to the advisor’s influence in capturing retirement plan rollovers, FINRA and the SEC have maintained review of such matters as a top examination item for several years. For this reason, it is important that you remember to carefully document the diligence of your work and client conversations to demonstrate that you’ve covered all options.
It seems simple. When participants change jobs or retire, they may choose to leave their money in their employer plan or roll the assets to an IRA at a time of their choosing. But the devil is in the details. Be sure to discuss the pros and cons of each option. For example, take care to educate clients on the potential benefits of leaving money in an employer-sponsored plan, such as:
In cases that involve company stock, review the ability to preserve net unrealized appreciation. The maximum federal capital gains tax rate is currently 20 percent, far lower than the top income tax rate of 37 percent, so your clients’ potential tax savings may be substantial. Additionally, employer stock should be evaluated for asset concentration within the overall retirement portfolio to determine whether it may make sense to diversify.
Cost is another factor to consider. Employer-sponsored retirement plans and IRAs typically have investment-related expenses, as well as plan or account fees. An IRA’s investment-related expenses may include sales loads, commissions, investment advisory fees, and fund expenses. Retirement plan or account fees may include allocated administrative fees, fees for specific participant services, and trustee or custodial fees. The overall estimated annual expenses of the proposed account must be reasonable for the amount and type of service provided. Offering more investment flexibility, personalized financial planning, and higher client service standards can warrant a higher market value, but that value should be both reasonable and comparable with others in your market offering similar services.
As a top source for information regarding the benefits and considerations surrounding retirement plan rollovers, advisors should be prepared to discuss specifics with existing and prospective clients. By positioning yourself as a key resource, individuals may very well turn to you when it’s time to decide what to do with their retirement assets.
Are retirement plan rollovers a significant source of new assets for your firm? Are you careful to document your conversations to ensure compliance with regulations? Please comment below.