Advice about 401(k) rollovers is poised for a big change. this is the reason

The agency says such recommendations may be tainted by conflicts of interest under current rules.

Rollovers are undoubtedly “the main focus” of the regulation, said Katrina Perichai, a lawyer at Stradley Ronon Stevens & Young.

“The Department of Labor has not been shy about it,” said Bereshaj, co-chair of the company's fiduciary governance group.

Rollovers are common, especially for retirement investors.

It often involves moving your nest egg from a 401(k)-type plan to an IRA.

In 2022, Americans transferred about $779 billion from workplace retirement plans to IRAs, according to the Council of Economic Advisers. analysis. Nearly 5.7 million people transferred money to an IRA in 2020, according to the latest IRS. Data.

The number and value of these transactions have increased significantly as more baby boomers enter their retirement years. In 2010, for example, about 4.3 million people transferred a total of $300 billion into IRAs, according to the IRS.

The Department of Labor's new rule aims to make investment recommendations more “fiduciary” in nature.

A fiduciary is a legal designation. At a high level, it requires financial professionals to provide advice that puts the client first. Experts said they had a duty to be wise, sincere and honest when providing advice to clients, and to charge reasonable fees.

Many of today's extension recommendations are not subject to a fiduciary standard under the Employee Retirement Income Security Act, the attorneys said.

Business officials fear it exposes investors to a conflict of interest, where advice may not be better for the investor but earns brokers a higher commission, for example.

Under current legal rules, dating back to the mid-1970s, a financial agent must meet five conditions to be considered an agent.

One such fork says they are fiduciaries if they provide advice on a regular basis, the lawyers said.

However, many extension recommendations do not occur as part of an ongoing counseling relationship. Instead, it's often a one-time occurrence, lawyers said.

This means it is “highly unusual” for today's extension recommendation to be subject to credit criteria, Resch said.

But a new Department of Labor rule changes that.

“Under this rule, one-time investment advice to take assets out of the plan would trigger a fiduciary status under ERISA,” said Bereshaj, who called the change a “major shift.”

Under the new rule, advisors are generally expected to consider factors such as rollover alternatives, including the pros and cons of keeping money in a 401(k) plan, Berisaj said.

For example, they'll likely compare the different fees and expenses of a workplace plan versus an IRA, as well as the services and investments available in both. She added that they will also provide certain disclosures to investors prior to the extension, such as describing the basis for that extension recommendation.

Good advisors are likely to make an honest effort to do what's best for their clients, but hopefully the DOL rule will “raise the bar to a better level,” Resch said.

“I think the goal of the Department of Labor is to encourage higher-quality advice, which will get people to invest better and at a lower cost,” Resch said.

However, many financial companies oppose the necessity of the Department of Labor rule.

For example, the regulation “will harm, for example, retirement savers and their ability to access the professional financial guidance they want and need,” said Susan Neely, president and CEO of the American Council of Life Insurers, an insurance industry trade group.

In addition, the Department of Labor “has chosen to ignore the significant progress that has been made to strengthen consumer protections” over the past few years, Neely said. They include rules issued by the Securities and Exchange Commission and the National Association of Insurance Commissioners.

These rules are “all less demanding than the DOL rule,” Resch said. “So, it's a higher standard across the board.”

This is especially true of recommendations from insurance agents to transfer money from a 401(k) plan to an annuity held in an IRA, due to differences in current legal rules versus Department of Labor requirements, according to attorneys and other financial experts.

“We believe insurance agents will be most vulnerable to this rule, especially those who sell annuities,” Garrett Seaberg, a financial services analyst at TD Cowen Washington Research Group, wrote in a recent research note.

He said industry groups would likely file a lawsuit to block the rule from taking effect.