Advisors, Get Ready for Rollover Mania

As advisors well know, plenty of clients and other folks that are not clients are retiring or nearing traditional retirement age. According to the U.S. Census Bureau, 12,000 Americans per day will turn 65 years old in 2024.

Add to that, by 2030, all members of the baby boomer generation will be at least 65 years old. Whether or not that means all of those folks will exit the workforce remains to be seen, but tens of millions of people turning 65 means they’ll be eligible for the middle tier of Social Security benefits. And yes, plenty of those folks will be exiting the workforce or entering new, part-time jobs.

That means advisors will increasingly retirement-related issues in the coming years and preparation for that starts today. Among the issues advisors need to be proficient in – many already are – is the 401(k) to individual retirement account (IRA) rollover.

Consider the following data point, courtesy of the IRS. In 2020, 5.7 million Americans rolled $618 billion from employer-sponsored retirement plans into IRAs. To put $618 billion into context, that would be good for the tenth-largest company in the S&P 500. Indeed, rollovers are “kind of a big deal.”

Why Rollovers Matter for Advisors

In theory, helping clients rollover funds from an employer-sponsored retirement plan into an IRA should be relatively easy. However, advisors should be aware of some changes to this process looming on the horizon.

Earlier this week, the U.S. Department of Labor proposed a rule aimed at closing rollover loopholes that previously allowed advisors to take risky, unnecessary liberties with capital rolled over by clients. That’s not to say a lot of advisors are engaging in such unscrupulous behavior, but the point is the new guidelines can actually benefit clients and that’s positive for advisors.

“These costs add up. Requiring advisers to make recommendations in the savers’ best interest can increase retirement savers’ returns by between 0.2% and 1.20% per year,” according to the White House. “Over a lifetime, that can add up to 20% more retirement savings—potentially tens or even hundreds of thousands of dollars per impacted middle-class saver that could otherwise have been lost to junk fees. For example, advice rooted in conflicts of interest regarding the sale of just one investment product—fixed index annuities—may cost savers as much as $5 billion per year. This hurts workers, families, and the American economy.”

Government doesn’t always get things right, but closing rollover loopholes indicates effort is in the right place. Plus, it’s important because advice from advisors on this front is usually a small, but vital part of the advisor/client relationship.

“Yet, one-time advice is often the most important advice the retirement investor will ever receive and affects roughly 5 million savers per year who are rolling their money out of 401(k)s and into IRAs,” adds the White House. “There is real money at stake. In 2022 alone, Americans rolled over approximately $779 billion from defined contribution plans, such as 401(k)s, into IRAs. The proposed rule will close this loophole to ensure this advice is in the saver’s best interest.”

Expanded Protections for Annuities

For advisors that frequently pitch annuities or have clients that are interested in those products, the new Department of Labor proposal is worth examining because it could lead to more federal oversight of fixed index annuities sales.

“These inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25 percent year-to-date. The proposed rule would ensure that retirement advisers must provide advice in the saver’s best interest, regardless of whether they are recommending a security or insurance product and where they are giving advice,” concludes the White House.

Related: Why Middle-Income Folks Need Advisors