It’s among the most important financial decisions you’ll make: What to do with the money in your employer’s 401(k) retirement plan when you leave the company. But can you trust the advice you get from your retirement plan’s sponsor?
The Biden administration isn’t sure you can.
That’s why the U.S. Department of Labor has proposed what’s known as the Retirement Security Rule. It would require that 401(k) advisers — often brokers and insurance agents — put employees’ interests first when making one-time recommendations about rolling 401(k)s over into individual retirement accounts.
Read: Retirement balances are at their highest in nearly two years, with 20% jump in 401(k) millionaires
“That advice they’re giving is going to follow you the rest of your life,” said Pam Krueger, the founder of Wealthramp, a company that vets financial advisers. She was speaking on a recent episode of the “Friends Talk Money” podcast she co-hosts with me and financial writer Terry Savage.
As Krueger wrote on MarketWatch, when 401(k) plan participants retire, they’re often bombarded with “educational” content from their plan’s service portal and emails “explaining” the rollover options that are available.
Today, 401(k) plan advisers are exempt from the Securities and Exchange Commission’s Regulation Best Interest that people selling investments like mutual funds must comply with. Insurance products often recommended by retirement-plan advisers, like fixed indexed annuities, aren’t covered by the rule.
From the archives: A ‘Hippocratic oath’ for financial advisers? The SEC’s new ‘Regulation Best Interest’ gets mixed reviews.
The White House calls this a loophole in the laws aimed at protecting retirement savers.
The ‘junk fees’ of 401(k) plans
In 2022, Americans rolled over about $779 billion from 401(k) and other retirement plans into IRAs. The White House Council of Economic Advisers estimates that Americans lose up to $5 billion a year as a result of advice they receive regarding 401(k) rollovers.
“An adviser may receive a commission as high as 6.5% to recommend some insurance products. When the saver pays for advice that is not in their best interest, and it comes at a hidden cost to their lifetime savings, that’s a junk fee,” according to a White House statement on the Retirement Security Rule.
If the rule takes effect, the White House said, it could increase retirement savers’ returns by between 0.2% and 1.2% per year, adding up to 20% more savings over a lifetime — potentially tens or even hundreds of thousands of dollars.
A need for holistic advice
Krueger thinks the intentions behind the Retirement Security Rule are admirable but believes the real problem is that retirement-plan advisers don’t know enough about individual employees’ financial lives to make appropriate recommendations.
“Can you honestly tell me that a one-time product recommendation for an annuity is really going to be the one-size-fits-all that aligns with every individual participant’s best interest without doing a deep dive into their family circumstances, their taxes, their health, their longevity?” she asked on the podcast.
Employee-benefits attorney Kevin Walsh, a principal with Groom Law Group in Washington, D.C., agreed with Krueger’s assessment. When financial advisers work with clients, they are typically “looking holistically at an individual, which can be different than looking at them just as a plan participant,” Walsh said on the podcast.
Deciding what to do with your 401(k) funds when you retire is a decision best made with a fee-only financial adviser who is a fiduciary, and not someone handpicked by your employer, Savage said on the podcast.
The fiduciary adviser can say, “We’re going to be the quarterback for you and we’re going to understand what you need and want and we’re going to explain it to you,” Savage said.
To roll over or not to roll over?
In a paper in the Financial Services Review titled “The pros and cons of remaining in a 401(k) plan after retirement,” retirement experts Olivia S. Mitchell, Catherine Reilly and John A. Turner concluded that many employees with “low or moderate levels of financial literacy” would likely find it financially rewarding to keep their 401(k) funds in their plans at retirement rather than roll them over into IRAs.
Leaving 401(k) money in employer-sponsored plans with professionally designed default investment options is likely to result in a lower-cost outcome for such people, the authors noted.
Plan sponsors, they added, have a fiduciary duty to participants to manage the plans in participants’ best interests.
Participants in 401(k) plans with high balances, they said, “may have more sophisticated investment and advice needs, for which IRAs can provide a wider range of options.” An IRA rollover could also be a beneficial decision for people in plans with high fees, they noted.
Krueger said that instead of the Retirement Security Rule, she’d like to see employers with 401(k)s give “practical education on where to go for rollover advice.”
What’s likely to happen
The Department of Labor has received more than 19,000 comments about its proposal, including intense opposition from the financial-services industry’s Insured Retirement Institute and the Securities Industry Financial Markets Association.
The Financial Services Institute, a trade group representing independent broker-dealers and financial advisers, is also against the rule, estimating that it would mean $2.5 billion in annual ongoing costs for financial-services firms, nearly 11 times what the Department of Labor expects.
But the CFP Board, representing certified financial planners, and the Institute for the Fiduciary Standard have endorsed the rule. The Financial Planning Association supports it, too, favoring a phased implementation.
Krueger expects the Department of Labor to finalize the rule this spring or summer but says that subsequent court fights from the financial-services industry could delay it or keep it from taking effect.
“You’re going to see a tug of war,” she said.
Regardless of what happens, Krueger said, employees should avoid making hasty decisions about what to do with their 401(k)s when they retire or blithely following recommendations from salespeople with vested interests.
