This new rule will bring a big change to the turnover of your pension plan

SmartAsset: new fiduciary rule for pension plan rollovers

SmartAsset: new fiduciary rule for pension plan rollovers

Billions of dollars are transferred from 401(k) plans to IRAs each year. And starting in July, the US Department of Labor (DOL) will require all financial advisers and brokers to meet a higher fiduciary standard for pension plan rollovers. Under the new DOL rule, all financial institutions and investment professionals must explain in writing why they are recommending a rollover and how it serves the best interests of their clients. Let’s see how this higher fiduciary standard will change pension plan rollovers.

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How will the new DOL rule affect bearings?

The new DOL rule, which takes effect July 1, sets a higher fiduciary standard for pension plan rollovers. While current law allows trustees to accept third-party payments for rollovers as long as they serve the best interests of their clients, the Biden administration will now require financial institutions and investment professionals to document why. and how this recommendation serves that interest.

In doing so, the DOL requires trustees to consider relevant factors, including:

  • other alternatives before transferring employee benefit plan assets to an IRA

  • fees and expenses associated with both the plan and the IRA

  • whether the employer pays some or all of the plan expenses

  • different levels of services and investments for the plan and the IRA

In December 2020, a Department of Labor rule approved at the end of the Trump administration exempted trustees from the Employees Retirement Income Security Act (ERISA)which enabled them to obtain third-party payments for recommending pension plan rollovers.

Under ERISA, the federal government had identified minimum standards for pension and health care plans in the private sector. According to the DOL websitethe 1974 law requires plans to:

  • provide attendees with information about features and funding

  • provide fiduciary responsibilities to those who manage and control plan assets

  • establish a grievance and appeals process for members to benefit from the plans

  • give participants the right to sue for benefits and breaches of fiduciary duty

These requirements generally align with the requirements of a financial advisor fiduciary duty, which obliges the advisor or firm to act in the best interests of a person or an institution. Duties include obtaining the best prices and terms for clients, providing all relevant facts, disclosing potential conflicts of interest, and offering accurate and thorough advice.

But keeping in mind the current ERISA exemptions, the DOL has made pension plan renewal a priority to guard against strong economic incentives that could create conflicts of interest for the needs and objectives of customer retirement.

“This requirement reflects the Department’s view that parties wishing to take advantage of the general relief from transactions prohibited in the new exemption should consciously determine at the outset that they are acting as trustees; tell their retirement investing clients that they give advice as trustees; and, based on their decision to act as trustees, implement and monitor the terms of the exemption”, the DOL said in a statement dated April 2021.

For reference, the 2021 Investment Company Information Booklet says $534 billion was transferred from pension plans to IRAs in the 2018 tax year. That’s nearly eight times more than the $70 billion made in new contributions in the same year.

3 reasons not to renew your retirement plan

SmartAsset: new fiduciary rule for pension plan rollovers

SmartAsset: new fiduciary rule for pension plan rollovers

Before transferring your assets from a 401(k) to an IRA, you should carefully consider your options.

One of the biggest advantages of a 401(k) over an IRA is that a the employer can match the contributions. This program can significantly increase your retirement savings with minimal effort.

A 2021 study by Vanguard indicates that about a third of Americans using 401(k) plans save below employer matches. This means that they are basically leave free money on the table. However, you should note that not all jobs offer job shadowing programs. Eligibility therefore depends entirely on your employer.

If you have a 401(k) plan, you may also want to think about loans or creditors. Depending on your financial needs, these two factors—beyond employer consideration—could influence your rollover decision:

  • Participants can borrow money against 401(k)s but cannot borrow against IRAs

  • 401(k) assets are generally protected from creditors; IRA assets can only be protected in the event of bankruptcy

3 reasons to renew your pension plan

For many people, turning their 401(k) plan into an IRA may be a good choice. With your financial needs, investment goals and risk tolerance in mind, here are three reasons why a pension rollover might be right for you:

  • Better investment choices. While 401(k)s have limited choices, usually invested in target date fundIRAs will allow you to diversify your asset selection with stocks, bonds and other financial investments.

  • Consolidation. If you have multiple 401(k)s from different jobs, you may want to consolidate everything into one account. Moving money from multiple 401(k)s to a single IRA could potentially save you money with reduced administrative costs. Depending on the 401(k) account, fund expenses, business fees, and annual percentages can add up even when you are no longer contributing. It is therefore important to do the math to see which option will cost you less.

  • No minimum distribution required. When you turn 72 (or 70.5 if you were born before July 1, 1949), most pension plans impose annual RMDs. However, if you reverse your 401(k) in a Roth IRA, your money can continue to grow in the account while you are alive. You should note that you will have to pay taxes on the money you carry forward during this tax year, but you will not owe taxes on any withdrawals after retirement.


SmartAsset: new fiduciary rule for pension plan rollovers

SmartAsset: new fiduciary rule for pension plan rollovers

Financial institutions and investment professionals could have strong economic incentives to transfer ERISA-protected plans into affiliated IRAs. Pension rollovers displace billions of dollars every year. And while the DOL is taking steps to create a higher fiduciary standard to protect against bad financial advice, transferring assets from a 401(k) to an IRA is an important financial decision that will impact the future of your retirement.

The DOL says that it “plans to take further regulatory and sub-regulatory action” which includes amending the “fiduciary investment advice regulations” and “modifying or revoking some of the other existing class exemptions available to fiduciary investment advice”.

Retirement Planning Tips

  • A Financial Advisor can help you put together a financial plan for your retirement. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • Fidelity says your retirement savings should cover 45% of your pre-tax and pre-retirement incomesocial security benefits making up the rest. The SmartAsset Retirement Calculator can help you estimate how much you’ll have saved by the time you’re ready to retire.

  • If you’re looking for money outside of your pension or retirement plan, here are five more ways to get a guaranteed retirement income.

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