Retirement Watch Lighthouse Logo

How Conflicted Is Your IRA Advisor?

Last update on: Jun 03 2020

Government regulators believe that many financial advisors give bad advice about IRAs because the advisors have inherent conflicts.

The main concern of regulators was what happens to an individual’s 401(k) account after leaving a job. The regulators concluded that too many advisors recommended that the 401(k) account be rolled over to an IRA, but that IRA wasn’t a better deal for the individual.

The belief led the Department of Labor to issue an extensive set of regulations, known as the fiduciary rule, requiring financial advisors to document why a rollover was recommended. Advisors were required to consider a number of factors in the recommendation.

Early in 2018, a federal appeals court ruled that the regulations weren’t valid. The Securities and Exchange Commission responded by issuing proposed regulations that aren’t as stringent as the fiduciary rule but appear to put a greater burden on advisors than current rules. The Financial Industry Regulatory Authority also issued guidelines for brokers to follow when making recommendations on rollovers.

A number of states now have issued or are working on their own versions of the fiduciary rule covering rollovers to IRAs.

Most of the discussion centers on whether brokers and insurance agents have lower fiduciary standards than registered investment advisors and other financial advisors. Under current law, they apparently do. I think you should ignore the regulations and noise regarding the rules.

Generally, it’s a good idea to assume that your financial advisor has some kind of conflict of interest. Brokers, insurance agents, and some other financial advisors often receive their income from commissions, so they benefit from having you roll over money to an IRA and make new purchases of investments or insurance products. But other investment advisors usually are paid a percentage of the value of the investment assets they manage.

Typically, they can’t manage assets in an employer’s 401(k) plan, so these advisors have an incentive to recommend the account be rolled over to an IRA that they can control. Probably the only financial advisors who don’t have a conflict are those who charge either an hourly rate or a fixed annual fee. They receive the same income regardless of what they recommend.

When you’re leaving an employer, take your time to decide what to do with the 401(k) account. First, ask the employer you’re leaving if there are limits to how long you can leave the money in the 401(k). Most allow former employees to leave their accounts indefinitely. Some put a time limit on how long they’ll hold a former employee’s account, and some limit the services and options available to former employees.

Generally, there is no reason to make a rushed decision.

Whether you’re working with a financial advisor or not, take the time to address these issues to decide the best option for you.

Will you have a new employer?

If you’re not retiring, consider your new employer’s 401(k) as an option. Most plans allow employees to roll over balances from other 401(k) plans and IRAs into the new plan. This could be a way to consolidate assets and also reduce costs.

Fees.

What are the fees charged by the 401(k)? First, compare the expense fees charged by the mutual funds offered in the 401(k) and in the IRA you are considering. Often, funds in 401(k) plans have lower annual fees than mutual funds you can own through an IRA.

Be sure to consider all fees and expenses. Often there are charges for transactions, such as distributions. Compare the current fees at both the 401(k) and IRA. Ask about the fees your financial advisor will charge. This is the area on which the fiduciary rule focused.

You need to know about any commissions or other amounts that will be deducted from your money in an IRA rollover. If your advisor will charge a continuing annual fee to manage the IRA rollover, that’s probably an additional fee you aren’t paying through the 401(k).

A 401(k) plan usually has an annual account maintenance or record-keeping fee. Sometimes this is paid by the employer. Sometimes it is deducted from participants’ accounts. Learn the details about this fee.

When it’s all sorted out, an IRA is likely to have higher fees than a 401(k), before considering any commissions or financial advisor fees. If that’s the case for you, decide if the additional costs of the IRA are worthwhile. The issues discussed below should help with that evaluation.

Advice and Other Services.

A financial advisor probably will provide investment management advice or services as part of the fees. Most 401(k) plans provide computer-assisted advice or no investment advice at all.

A financial advisor also might bundle the investment management services with broader financial planning. The planning services might not be available through the 401(k) or might not be personal and customized. Determine if these services are important to you and worth the cost.

Investment Options.

A 401(k) plan usually has a relatively small number of investment options. An IRA at a broker or mutual fund firm is likely to have far more investment options. The question is how many of those options you’re likely to use and if they are worth any additional cost of being in the IRA instead of the 401(k).

While 401(k) investment options are limited, they usually are carefully selected, especially at larger employers. You’re likely to be able to invest in at least one fund representing each of the major asset classes and perhaps other classes. The funds usually are selected because they are among the top performers in the asset class and have low fees.

A 401(k) plan might offer options not available through IRAs, such as a stable value or guaranteed interest fund. The 401(k) also is likely to offer target date funds or similar options. Decide how you’re likely to invest in retirement and if the 401(k) meets your needs.

Special Assets.

The Department of Labor’s fiduciary rule was believed to partly target insurance agents who convince retiring employees to move their 401(k)s into IRAs to buy high-commission, high-expense annuities. If you’re interested in annuities generally and can’t buy them through the 401(k), that’s a reason to roll over your 401(k) to an IRA.

But you shouldn’t decide to roll over the 401(k) because someone made a presentation about a particular annuity and it looked attractive. You need to compare different annuities as part of your retirement planning.

First, decide if an annuity should be part of your retirement portfolio.

Then, decide on the annuity to buy after doing a comprehensive search.

Investment Changes.

How often can you make changes in your account?

Some 401(k) plans limit the frequency of changes and might limit changes in some funds to certain time periods, such as the end of the month. Most IRA investments can be changed daily or more frequently. Decide if any difference between the two is important to you.

Those are the key factors to consider when deciding what to do with your 401(k) account when leaving your employer. Evaluate them carefully.

A good, objective financial advisor will help and provide a comprehensive comparison of the options.

If an advisor won’t help with such an evaluation, that should be a red flag to you. Once you have reached a decision, write down the reasons why it is the best choice for you and the factors you considered.

bob-carlson-signature

Retirement-Watch-Sitewide-Promo

Log In

Forgot Password

Search