The dilemma: When you leave a job voluntarily for another (as many early in their careers do) or retiring, what exactly should you do with your employer-sponsored 401(k)?
The trend: While you aren’t required to move money from a workplace plan to an Individual Retirement Account (IRA), it’s very common for people to do so. Rollovers move money from one plan to another, sheltering them from taxes, offering greater investment choices, and consolidating assets in a current account. According to a recent report from the Investment Company Institute, rollovers from employer-sponsored retirement plans have fueled recent growth in IRAs.
The numbers: As of the middle of 2020, Americans held $10.8 trillion in IRAs according to the institute. Despite that large number, the research showed that only 12% of households contribute new money to traditional or Roth IRAs. That means that most of the money in those accounts got there via rollover or investment gains, not new investment.
New federal guidance: The U.S. Department of Labor, which is tasked with overseeing retirement plans, recently issued new regulations on this issue in order to help consumers achieve better outcomes. According to the department, “The decision to roll over assets from a plan to an IRA is often the single most important financial decision a plan participant makes, involving a lifetime of retirement savings.” The intent of the new regulation is to “promote investment advice that is in the best interest of retirement investors.”
The good news for consumers: The new rule requires all advisors to be fiduciaries, acting in their clients’ best interests specifically when dispensing rollover guidance. Acting as a fiduciary includes disclosing conflicts of interest, offering prudent advice, charging reasonable fees, disclosing why rolling money into an IRA is in a client’s best interest, and in sum, acting with undivided loyalty. The new rule will go into effect in December and will prevent advisors who don’t meet fiduciary standards from handling rollovers going forward.
Rollover tips: If you are in the market for an IRA rollover, keep in mind that directly moving assets from your employer’s fund to a new custodian without ever taking possession can work most smoothly, as it circumvents triggering taxes. Alternatively, you can take possession of assets from an employer account so long as you roll them over within a 60-day window. (Note, there are additional potential penalties associated with this approach.)