Beware When Your Financial Adviser Suggests Rolling Over Retirement Savings

However, rollovers have their pitfalls. Given their significance, a rollover ranks as one of the largest and most critical monetary choices you might face.

The Financial Industry Regulatory Authority, known as Finra, is ramping up its oversight of financial advisors’ advice regarding rollovers, particularly when these suggestions affect retirees and elderly clients. Seniors who opt for such transitions with their retirement funds could inadvertently end up in a less favorable position compared to keeping their money where it is.

Here’s the rephrased version:
The positive development: When advising clients about plan rollovers, broker-dealers and registered representatives are now required to adhere to Regulation Best Interest (Reg BI). This regulation mandates that their suggestions align with a higher duty of care, ensuring that these recommendations prioritize the client’s interests above all else.

Even with this rule and Finra’s supervision, potential dangers still persist. It might come as a surprise that when you decide to transfer money from an old 401(k), IRA, or comparable retirement plan into another type of account, you could be subject to undisclosed charges, tax fines, reduced investment choices, and diminished safeguards.

“Investors should assess the complete expenses associated with a suggested rollover prior to proceeding,” stated Craig Ferrantino, a financial advisor based in Melville, N.Y.

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Follow your money

Enumerate all associated fees and expenses, then contrast them with those of your present plan. Ensure that the suggested transfer won’t result in any tax obligations or fines.

The advisor’s suggestions ought to encompass written material that presents information in straightforward language along with accessible charts and tables. This will enable you to contrast the attributes, advantages, expenses, and tax implications associated with different types of accounts and rollover options. Consider obtaining a hard copy of this plan and consulting with your accountant, lawyer, and other trusted individuals for further advice.

Think about how the advisor receives payment. Often, they charge a fee based on the assets under management, usually approximately 1%.

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If there’s pressure to move all your possessions (such as your retirement savings) to their company, determine the overall costs involved. In addition to their fees, inquire about the expense ratio for the recommended investment options (this includes charges like fund management, promotional activities, administrative tasks, etc.).

Certain advisors have preferences when it comes to specific product types or custodial services, so ensure you comprehend the reasoning behind their advice on rolling over your retirement savings. These advisors might direct their clients’ funds towards a particular financial institution and receive incentives based on the amount of business they generate for that company.

Question everything

Inquire about the advantages and disadvantages of various rollover options prior to making your choice. Also, ask about their motivations.

Ferrantino suggested asking, “Could there be any sales bonuses you receive for suggesting this?” and “Is there any potential conflict of interest in you selling me this product?”

Fred Reish, an attorney and Faegre Drinker partner based in Los Angeles, recommends that individuals planning for retirement should inquire with their financial advisor about these key points prior to approving a rollover:
1. What are the fees associated with my current plan compared to the new one?
2. Are there penalties or surrender charges for leaving my present investment vehicle?
3. How will this move impact my long-term savings strategy?
4. Can you outline how transaction costs might affect potential returns?
5. Does moving my account now align better with achieving my future goals than staying put?
Before giving consent for a transfer of funds, retirees ought to ensure they have all necessary information regarding cost implications and strategic considerations involved in such transitions.

• Will you keep an eye on the new investments following the initial recommendation?
• What are your charges, and do you receive any payment or perks from anyone besides me?
• What investment approach do you believe would be best for achieving my objectives? Could you explain your reasoning behind this suggestion?

If the advisor fails to provide clear and understandable responses to these queries, it serves as a warning sign,” Reish stated. For instance, plan fiduciaries must continually assess the plan’s investment choices; thus, the reply to the initial query ought to be a simple “affirmative.

He points out that when you compare the overall expense of the suggested rollover against your present plan, consider even modestly higher percentage fees as noteworthy.

If the overall expense of the proposal, encompassing the advisor’s fee, significantly exceeds your current plan’s costs, ensure that extra benefits are provided to warrant this discrepancy,” he advised. “Keep in mind that even a minor percentage like 0.5% or 1% could accumulate into substantial sums over extended periods.

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