- Rollovers from 401(k) plans to IRAs will be most affected by a recent U.S. Department of Labor proposal that would increase protections against retirement recommendations, legal experts say.
- Approximately 5.7 million Americans deposited a total of $618 billion into IRAs in 2020, according to IRS data.
- The Department of Labor is concerned that financial disputes could lead to brokers giving investment advice that is not in the best interest of their clients. Critics argue that the current regime provides sufficient protections.
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Approximately 5.7 million Americans contributed a total of $618 billion to IRAs in 2020, according to the latest research. IRS data. That’s more than double the $300 billion a decade ago.
IRAs will hold about $11.5 trillion in 2022, nearly double the $6.6 trillion in 401(k) plans. according to To the Investment Company Association. The majority of these IRA assets come from rollovers.
In 2022, more than 4 in 10 U.S. households (about 55 million of them) owned an IRA, according to ICI.
From the Ministry of Labor’s perspective, there is a problem here. A 401(k) investor has certain protections that generally do not apply to her IRA investments or advice on transferring funds to an IRA.
Every company that sponsors a 401(k) plan has a “fiduciary” duty to its employees, as codified in the Employee Retirement Income Security Act of 1974.
That means you have a legal responsibility to act in the best interests of your workers, including choosing a company 401(k) investment fund and making sure costs are reasonable.
“ERISA’s fiduciary duty is the highest fiduciary duty under U.S. law,” said Josh Lichtenstein, a partner at law firm Ropes & Gray.
Legal experts say current law exempts most rollover advice from these protections. For example, the exemption applies to a broker who recommends a one-time transfer to a 401(k) investor into her IRA and then maintains no regular relationship with him.
Investors also often pay higher fees for IRAs compared to 401(k) plans, according to a recent study by the Pew Charitable Trusts. People who transferred funds to their IRAs in 2018 stood to lose a total of $45.5 billion in savings over 25 years in fees and lost profits, Pew found.
Julie A. Hsu, nominee for Deputy Secretary of Labor, testifies during her Senate Health, Education, Labor, and Pensions Committee confirmation hearing on March 16, 2021 in Washington, DC.
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The Labor Department rule would crack down on financial conflicts that can exist when brokers, insurance agents and others encourage consumers to roll funds into IRAs.
This advice typically generates commissions and other compensation for brokers and agents, and the Department of Labor suspects that these incentives may be biased toward recommending certain investments that pay higher fees but are not in the investor’s best interest. I am concerned that this may not be the case.
For example, the White House Council of Economic Advisers Estimate Consumers are losing up to $5 billion a year just because of contradictory advice to roll their money into indexed annuities, a type of insurance product.
Experts say the department’s proposed rules would expand ERISA’s fiduciary protections to cover most rollover solicitations.
David Levine, principal at Groom Law Group, said this is “a big change.”
He added: “They are trying to close what they see as gaps in the regulations.”
He expects the final rule to be published in the spring and take effect in early summer 2024.
Experts say many rollover transactions are already overseen by other regulatory agencies, such as the Securities and Exchange Commission and the National Association of Insurance Commissioners.
But the Labor Department’s proposed standards are stricter than the existing system, Lichtenstein said.
Critics of the Labor Department’s rules believe existing measures provide sufficient protection for retirement savers, but supporters of the rules argue that this is not the case.
The Obama administration also sought to strengthen protections for retirement savers, including rollovers, but that provision was struck down by a court in 2018.
Prior to the court’s decision, Obama-era regulations had reduced options for retirement savers, including reducing the number of commissioned brokers offering retirement advice, Lichtenstein said. That’s what it means. He would expect similar developments in the current effort.
“I think it’s hard to argue that there aren’t stronger investor protections,” Andrew Olinger, a partner at Wagner Law Group, said of the proposal. “I don’t know if the department went too far or not far enough.”
