Making 401(k) rollover recommendations can be a tricky endeavor for advisors. There are certain steps they must follow to ensure they're fulfilling their fiduciary duties.
CFPs should encourage individuals considering rollovers to get financial advice, not just general education, according to a new
More than $1 trillion in assets are rolled over annually, either from 401(k) plans to individual retirement accounts or from 401(k)s to new employer-sponsored plans, according to the CFP Board.
"Bad or conflicted advice can expose the client to unnecessary costs or significant tax penalties," the board wrote.
Even if a client were to give a CFP a "directed order" to roll over assets, the advisor still must let the client know if there is "information that would cause a prudent professional to determine that the rollover is not in the client's best interests." Similarly, if the order is based on incomplete or inaccurate information or assumptions, the advisor is required to correct that misunderstanding. For example, there are myths that rollovers are required and can be undone in the future, but they might not be required and could be irreversible.
"Rollovers are an important and timely topic: the number and dollar amount of 401(k) rollovers is increasing every year as the Baby Boomer generation retires and younger people switch jobs," Brian Wong, assistant general counsel for standards at the CFP Board, said in a statement to Financial Planning. "Bad or conflicted financial advice about rollovers can expose the client to unnecessary costs or significant tax penalties. The guide helps CFP professionals provide sound advice about this important financial decision."
Advisors also must fully disclose material conflicts of interest and prevent conflicts from compromising their abilities to act in the best interests of clients. Potential conflicts include if rolling over assets would give the advisor or the advisor's firm compensation, and this could happen no matter the compensation model that is used.
Another potential conflict could arise if a specific account choice or compensation model would give the most revenue to the advisor or their firm, while another type would be in the best interest of the client. In addition, certain investment recommendations might yield more compensation than others, such as when firms have revenue-sharing agreements with mutual fund companies.
The biggest value from the CFP Board's new guide, according to Andrew Fincher, a Vienna, Virginia-based CFP with VLP Financial Advisors, is it helps advisors understand how to practically apply fiduciary duties to rollover decisions.
"What I found particularly helpful is the emphasis on recognizing that a rollover recommendation is really a series of decisions, rather than simply 'roll it over or don't,'" Fincher wrote in an email to Financial Planning. "The guide provides a useful framework for comparing the existing plan with alternatives and considering things like fees, investment options, services and other plan features. It gives advisors a much clearer roadmap for documenting why a recommendation is in the client's best interest."
Documentation is another part of the duty of care. Although it isn't required when giving financial advice that doesn't require financial planning, the CFP Board still recommends documenting the way in which the advisor applied the duty of care process, particularly related to alternatives considered and why a rollover was in the client's best interest. Without documentation, it might be difficult for an advisor to demonstrate advice was in the best interest of the client.
Regulatory oversight in the area of rollovers is tough, including related to documentation — even after courts vacated the Biden administration's retirement security rule.
The CFP Board's guide ends with a two-page checklist for how to apply the duty of care to rollovers.
There are risks to doing this wrong. Creative Planning, an Overland Park, Kansas-based registered investment advisory firm that provides wealth management and family office services for individuals and businesses and has $295.57 billion in regulatory assets under management, is defending a class action lawsuit over 401(k) plan recommendations. The employee and plan participant who filed the suit accused the fiduciaries of steering assets to target date funds that had lower-than-normal equity exposure, according to a report in wealthmanagement.com. Creative Planning did not respond to Financial Planning's request to comment for this story.
