Regulators are sending a clear warning: Beware the IRA rollover.
The Financial Industry Regulatory Authority (FINRA), which self-polices the brokerage industry, issued a regulatory notice late last month warning member firms against overselling clients on shifting retirement dollars from 401(k)s to individual retirement accounts when they retire or change jobs. Likewise, a report last year by the U.S. Government Accountability Office found that plan providers often sell IRA rollovers to workers without laying out the alternatives.
The warnings come as the U.S. Department of Labor gears up to propose broad new rules later this year that would require brokers to act as fiduciaries, including when they advise clients on rollovers.
The financial services companies that administer 401(k)s have a huge economic incentive to encourage rollovers, since they generate transaction fees on trades and ongoing account fees. And it’s big business. Households transferred $288 billion from workplace plans to IRAs in 2010, according to the most recent data from the Investment Company Institute (ICI). That figure dwarfed the $12.8 billion in direct contributions that year – and the rollover numbers are expected to swell as boomer retirements accelerate
Rolling over your account to a new employer’s plan or to an IRA can make sense – and it’s certainly a better option than cashing out. But sometimes, you’re better off staying put. My Reuters Money column today looks at the critical questions to weigh if you’re evaluating a rollover decision. Also check out further thoughts on rollovers from my colleague John Wasik.