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Post: Robert Powell’s Retirement Portfolio: You got a new job. Now what should you do with your old 401(k)?

What should you do with your 401(k) when leaving your employer?

Well, you’ve got many options.

Read: Should I roll over my 401(k) when I get a new job?

Read: Why rollover IRAs can be dangerous

But if you decide to roll it over to an IRA and work with an adviser know this: The brokers, insurance agents, registered investment advisers and others of that ilk who provide “advice and recommendations” for IRA rollovers must comply with a long — and we do mean long — list of duties imposed upon them by the Department of Labor’s Fiduciary Rule 3.0.

It’s important to know that advisers don’t have to give you IRA rollover advice. It’s a choice. Some will choose to educate you about the pros and cons of rolling assets from an employer’s retirement plan to an IRA and then let you decide what’s in your best interest.

Read: New research shows 401(k) leakage is more severe than some believed

But those who choose to provide advice and recommendations must act in your best interest, not theirs.

Not surprisingly, those who don’t comply with the Labor Department’s duties could, as of Feb. 1, 2022, face some unpleasant consequences. For instance, an adviser and/or firm could lose the ability to provide advice using something called Prohibited Transaction Exemption (PTE) 2020-02, Improving Investment Advice for Workers & Retirees, according to Jenny Kiffmeyer, the chief operating officer of Retirement Learning Center.

The PTE 2020-02, according to the Retirement Learning Center, allows financial advisers and financial institutions that give investment advice to retirement investors to be paid for their services without engaging in what’s referred to as a prohibited transaction under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC). 

According to Kiffmeyer, here’s what investors/plan participants should expect to receive from the financial adviser who is providing advice for a fee:

  1. advice in accordance with the “Impartial Conduct Standards,” which mandates that advice be given in the best interest of the retirement investor at a reasonable price without any misleading statements;

  2. An acknowledgment in writing of the adviser’s fiduciary status under ERISA and the IRC;

  3. A description in writing of the services to be provided and any material conflicts of interest that may exist; and

  4. If the advice involves a rollover recommendation, then a document detailing the reasons that a rollover recommendation is in your best interest and a justification for the rollover in writing to you. (Of note, the Labor Department won’t be enforcing the rollover documentation and disclosure requirements of PTE 2020-02 until July 1, 2022. But the Labor Department is enforcing all other rules outlined in PTE 2020-02.)

So, what factors should financial institutions and investment professionals consider and document when recommending that rollover is in your best interest? Well, according to the Labor Department, the relevant factors include but are not limited to:

  1. the alternatives to a rollover, including leaving the money in the investor’s employer’s plan, if permitted;

  2. the fees and expenses associated with both the plan and the IRA;

  3. whether the employer pays for some or all of the plan’s administrative expenses; and

  4. the different levels of services and investments available under the plan and the IRA.

And, when considering the alternatives to a rollover, the Labor Department notes in its FAQ on the subject that “financial institution and investment professional generally should not focus solely on the retirement investor’s existing investment allocation, without any consideration of other investment options in the plan.”

For rollovers from another IRA or from a commission-based account to a fee-based arrangement, the Labor Department notes that a prudent recommendation would include consideration and documentation of the services under the new arrangement. “As relevant, the analysis should include consideration of factors such as the long-term impact of any increased costs; why the rollover is appropriate notwithstanding any additional costs; and the impact of economically significant investment features such as surrender schedules and index annuity cap and participation rates,” the Labor Department wrote.

And, to satisfy the documentation requirement for rollovers from an employee benefit plan to an IRA, the Labor Department notes that investment professionals and financial institutions should make diligent and prudent efforts to obtain information about the existing employee benefit plan and the participant’s interests in it.

This, by the way, is where you come in. In addition to obtaining your plan’s documents, auditor’s report and Form 5500, your adviser will need your 401(k) plan’s fee disclosure notice, the 404a-5, which shows your in-plan fees. Your adviser will use your 404a-b to contrast your 401(k) fees “to the (likely highly) IRA fee environment (which will need to be justified by the elevated service and investment capabilities),” according to the Retirement Learning Center.

And if you don’t provide that information, even after your adviser, as required by PTE 2020-02, explains the significance of the 404a-b, and assuming the information is not otherwise readily available, the financial institution and investment professional will, according to the Labor Department, have to make a “reasonable estimation of expenses, asset values, risk, and returns based on publicly available information.”

If your adviser and financial institution go down this route, they will, according to the Labor Department, have to document and explain the assumptions used and their limitations. In such cases, the financial institution and investment professional could rely on alternative data sources, such as the most recent Form 5500 or reliable benchmarks on typical fees and expenses for the type and size of the plan at issue.”

Bottom line. There’s a right and a wrong way for advisers to provide IRA rollover advice. And, if advice is what you want, you should expect nothing less than the right way.

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