Help Participants Avoid an Inappropriate IRA Rollover

The Government Accountability Office recently found that much of the information touting the benefits of IRA rollovers isn’t always objective. This prompted the Financial Industry Regulatory Authority (FINRA) to alert investment advisors and brokerage firms that it’s investigating inappropriate IRA rollover solicitations to 401(k) plan participants nearing retirement. In turn, plan sponsors should be aware of employees who may be persuaded to roll over assets into expensive or poorly designed and managed IRAs.

FINRA identified factors to consider before rolling 401(k) plan assets into a particular IRA. Plan sponsors should ask participants how a proposed IRA compares to the 401(k) plan in the following ways:

  • What’s the range of investment options available?
  • How are investment-related and plan or account fees charged?
  • What level of customer service is available?
  • What are the tax consequences, including penalties, for premature rollovers?

Additionally, FINRA recently released an “investor alert” featuring tips for making sound decisions on IRA rollovers. Plan sponsors should remind participants to:

  • Evaluate all transfer options (leaving account where it is, rolling it over or cashing it out),
  • Minimize taxes by rolling Roth to Roth and traditional to traditional,
  • Think twice before making an indirect rollover — 401(k) plan to participant to IRA,
  • Be wary of “free” or “no fee” claims,
  • Research conflicts of interest,
  • Compare investment options and other services,
  • Understand fees and expenses of all options,
  • Discuss the options with a financial or tax professional,
  • Determine if age affects the tax treatment of withdrawals between the 401(k) plan and IRA, and
  • Analyze tax implications of any appreciated company stock.

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