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IRA Rollovers: The Path Forward through Regulatory Change

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It’s likely that the Biden Administration is going to seek to toughen the current Department of Labor (DOL) fiduciary rule so it aligns more closely with the 2016 version. And, at the same time, in 2021 we’ll see the SEC start examinations for Reg BI — and these examinations are likely to be more aggressive than originally anticipated. Over the long term, we may see Reg BI get toughened further.

While financial services firms should look at several areas to strategically respond to these challenges, I believe there is one area where most companies will likely need to do the most re-thinking: IRA Rollovers.

For several years now, regulators have been putting greater focus on IRA Rollover recommendations – from FINRA guidance in 2013 to the new fiduciary regulation issued by the DOL last July. But is it not surprising: Every year an estimated $500 billion moves out of essentially institutionally priced retirement plans to retail-priced IRA Rollovers.

Solving the Rollover Dilemma

There are several reasons why an IRA Rollover would be in the “best interest” of the investor. These include:

• A broader selection of product solutions;
• More customized and personalized delivery of advice;
• And/or more sophisticated financial planning, such as wealth transfer strategies.

One challenge is to clearly and timely disclose these advantages, as well as the related fees. But firms and financial advisors will also have to “show their homework” before the Rollover recommendation. In other words, a service provider will need to present documentation for how they came to the conclusion that a Rollover is in the client’s best interest.

What’s the best solution to this challenge? It depends on your business model.

For example, 401(k) platforms should look closely at their participant engagement processes. An ideal structure could allow participants to affirmatively move from education, to guidance, to advice, to purchase. The benefits and costs should be clearly presented and participants encouraged to choose what is in their best interest.

As an added benefit, if this journey is packaged within a broader financial wellness context it would be appealing to most plan sponsors, which could lead to more 401(k) business. Furthermore, it would reduce IRA Rollovers going to competitors.

However, firms with a classic financial advisor model do not always have the natural connection to the participant experience. In this case, I believe an effective way to demonstrate that “homework” was done is to lead with a financial plan. A financial planning process is a natural way to address the pros and cons of an IRA Rollover and for financial advisors to demonstrate their added value. And helping an individual achieving the specific goals stated in a financial plan is in their best interest.

One key next step for financial advisors is to look at how many financial plans they have created and delivered to their clients. This is particularly important for those clients that are more likely to be soon considering an IRA Rollover; i.e., clients that are 50 to 65 years old.

What's Next?

Before the Biden Administration’s shifts their attention to this regulatory regime, I recommend that financial services companies spend the next few months looking at their IRA Rollover processes. At Princeton Financial Consultants, we can help you with an initial assessment and a more detailed analysis. We can also help you design a new operating model as well as your execution process. There are clear strategic advantages in keeping ahead of the latest regulatory trends.

Contact us for a personalized consultation today.

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