How Retirement Account Rollovers Just Got Better

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Editor's Note: This story originally appeared on NewRetirement.

Millions of people roll over their workplace 401(k)s and other kinds of accounts into an IRA every year. Right now, brokers and investment advisors can provide guidance on those rollovers without upholding a fiduciary standard.

However, new guidance from the Labor Department will mandate that the fiduciary standard be applied to advice on all retirement accounts, including rollovers.

Proposed fiduciary rule is designed to protect consumers

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As of right now, some kinds of financial and investment professionals can administer advice on retirement accounts, particularly rollovers, without utilizing any kind of fiduciary standard.

That means that an advisor who is assisting with a rollover could potentially recommend an investment product like a costly annuity or a fund with high fees that is not in the best interest of the investor.

The Department of Labor is proposing the Retirement Security Rule that would require any advisor who is providing guidance on a retirement account, including rollovers, to act as a fiduciary.

In other words, advisors working with a client on retirement savings must put the investor’s interests ahead of their own.

Rollovers represent billions

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According to the most recent data from the Internal Revenue Service, in 2020 nearly 5.7 million people rolled $620 billion into IRAs. And, it is believed that those numbers will continue to grow.

The Retirement Security Rule is particularly designed to protect consumers when they do rollovers.

When the rule takes effect

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The Labor Department’s Employee Benefits Security Administration has set an initial effective date of Sept. 23 for many provisions and a full compliance deadline for September 2025.

However, it faces lawsuits and has the potential to be overturned by Congress.

The government’s position is to protect investors’ retirement savings.

“If it’s advice about your retirement, that should have a high standard that applies across the board,” said Ali Khawar, the Labor Department’s principal deputy assistant secretary of the Employee Benefits Security Administration.

Confused? Let’s define rollovers and fiduciary standards

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Let’s define fiduciary and cover what rollovers are, and why people do them.

What is the fiduciary standard?

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The fiduciary standard is a legal and ethical obligation requiring individuals or entities to act in the best interests of another party, putting the interests of that party above their own.

In the context of financial advising, a fiduciary is obligated to provide advice and recommendations that prioritize the client’s financial well-being. This standard requires advisors to disclose any potential conflicts of interest and to provide transparent and objective advice.

Fiduciaries are held to a higher standard of accountability and must adhere to principles of loyalty, prudence, and care when managing their clients’ assets. This standard contrasts with the suitability standard, which requires advisors to recommend products that are suitable for their clients’ financial situations, but not necessarily in their best interests.

NOTE: Some, but not all kinds of financial advisors already adhere to the fiduciary standard. The following types of advisors already apply the fiduciary standard when advising on retirement savings:

  • Registered Investment Advisors (RIAs) have been required to adhere to a fiduciary standard since the Investment Advisers Act of 1940, so the new fiduciary rule doesn’t change much for them since they’ve already been meeting this standard.
  • The same goes for CFP professionals, who commit to act as a fiduciary when providing financial advice to a client at all times.

What is a rollover?

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A rollover from a workplace retirement account involves transferring funds from an employer-sponsored retirement plan, such as a 401(k) or 403(b), into another retirement account, such as an IRA (individual retirement account). This transfer typically occurs when an individual leaves their job or retires.

When done according to rules, a rollover is not a cash-out of your retirement monies. You retain all of the tax benefits and do not pay penalties on the funds you rollover.

Why roll over funds from a workplace 401(k) to an IRA at retirement?

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Rollovers offer several benefits, including the opportunity to consolidate retirement savings from multiple employers into a single account, which can simplify management and potentially reduce fees.

Additionally, rollovers provide greater control over investment options and may offer more flexibility in withdrawal strategies.

Furthermore, by rolling over funds into an IRA, individuals can continue to benefit from tax-deferred growth and potentially access a wider range of investment choices tailored to their financial goals and risk tolerance.

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