The U.S. Department of Labor, which oversees retirement plans, issued a new rule in February 2021. This new rule expands ERISA’s regulations to rollover assets from a 401(k). ERISA regulations mandate those that manage and control plan assets to act as fiduciaries. In summary, financial advisors are now required to act in your best interest when making recommendations on assets that are rolling out of your 401(k) and the assets already out of your 401(k).
Before this rule was put in place, advisors could recommend their clients rollover their 401(k) and invest in high-commissioned products such as loaded mutual funds or annuities, which will provide higher compensation to the advisor, but may not be in the client’s best interest. Now, any advisor making a recommendation to rollover assets from a 401(k) must act as a fiduciary in making that recommendation and make investment recommendations in a fiduciary manner.
This rule change could be very impactful. Remember, when advisors act as fiduciaries, they disclose conflicts of interest, offer prudent advice, charge reasonable fees, and divulge why rolling money into an IRA is in their best interest. When these rules go into effect in December, expect to see those advisors who won’t be able to meet the higher fiduciary standards, no longer handling rollover requests.
If you have recently retired, considered retirement, or changed jobs, what are the options with your 401(k) or other employer sponsored plan?
Many plans allow former employees to leave their accounts in place, although some will not. The funds in your account will remain invested as they were, but you will be unable to make additional contributions. Additionally, because your account is still part of the employer’s plan, you may be subject to administrative fees.
Take a Distribution
A distribution entails moving cash from the plan and into your bank account to spend elsewhere. Taking a distribution can be a source of fast cash; however, there are tax implications and penalties that should be considered before accessing that cash. Many individuals that take distributions early end up paying over 30% in taxes and penalties.
Roll it Over
If you’re still working, you may be able to roll the 401(k) to your new company’s sponsored plan or convert it to an Individual Retirement Account (IRA). If you’re retired, then rolling over to an IRA would be the conversation you would have with your financial advisor. When it comes to rolling over assets of any kind, not only is it crucial to have a fiduciary on your side, but it’s now the rule.
When determining which option is best for you, seek advice from a fiduciary. CPS Investment Advisors is legally and ethically obligated to act in the best interest of our clients.
Tamara L Jemison
Retirement Plan Specialist