In a February 13, 2023 decision from the U.S. District Court, Middle District of Florida, a portion of the U.S. Department of Labor’s Prohibited Transaction Exemption (PTE) 2020-02, which led to the adoption by firms of new policies and procedures relating to rollovers from qualified retirement plans (and IRAs) to IRA accounts, was struck down in part. Essentially, the trial court judge ruled the Department of Labor’s 2020 interpretation of ERISA, that asserted firms have to treat rollover recommendations as fiduciary advice beginning at a first client meeting, was “arbitrary and capricious.”
But the decision is just the beginning of a process, both at the trial court level, and then (likely) in appellate courts. It is possible that the trial court’s decision could be stayed. It is also possible that another pending case, in another state, regarding the DOL rule, might result in a different opinion. Even then, the DOL seems poised to issue – sometime in 2023 – a new rule on IRA rollovers.
Even if the Department of Labor PTE 2020-02 (and any successor rule) is finally set aside, broker-dealers, investment advisers, and insurance agents all must continue to meet other regulatory requirements relating to IRA rollovers:
Registered Representatives of Broker-Dealers. Regulation BI sought to align broker-dealer obligations with the fiduciary duty applicable to investment advisers. The SEC staff’s FAQs on Reg BI expressly stated: “In the staff’s view, prior to recommending a retail customer roll over or transfer assets, such as from a brokerage to an advisory account, you should take into consideration, among other factors, the potential risks, rewards, and costs associated with the transfer or rollover of the securities, including whether the transfer or rollover would require a sale of securities. This would include consideration of any fees and costs related to any such sale of securities or to the rollover or transfer of assets, such as deferred sales charges or liquidation costs. Moreover, you would need to consider the potential risks, rewards, and costs associated with the advisory account (including, for example, the projected cost to the retail customer of the account), and weigh such factors in light of the particular retail customer’s investment profile, as well as other relevant factors.
Investment Advisers: The SEC’s 2019 Fiduciary Interpretation reaffirmed that an investment adviser’s fiduciary duty applies to all investment advice provided to clients, including advice about whether to roll over assets from one account [e.g., a 401(k) or other qualified retirement account) into a new or existing account that the adviser or an affiliate of the adviser manages].
Insurance Agents. PTE 84-24 requires insurers and agents to ensure that each transaction be on terms “at least as favorable” to the participant as an arm’s length transaction. The rule also requires that the combined total of all fees, commissions and other consideration received by the insurance company or agent must be “reasonable.”
Complying with the IRA Rollover Rule: Justifying the Rollover.
The SECURE ACT 2.0, signed into law in late December 2022, removed a key justification for rollovers of Roth accounts, by removing the requirement that Roth 401(k), 403(b) and 457(b) accounts had to take required minimum distributions. Since many qualified retirement plans did not permit partial rollovers, this led to a relatively easy justification for rollovers, by financial advisors.
But, many potential justifications for rollovers remain available to financial advisors. Here is my own list of potential reasons why a rollover might make sense. (These reasons should be weighed against factors that would indicate when the rollover to an IRA would not be beneficial to the customer or client).
- Assist You with Investment Strategy Selection, Security Selection, and/or Portfolio Management
- Secure access to a wider range of investment options, as a means of seeking higher returns over the long term in asset classes not reflected in the current account, and/or seeking risk reduction through minimization of idiosyncratic (diversifiable) risk in your overall portfolio by combining such asset classes and the securities within those asset classes appropriately
- Tracking and oversight of investment portfolio to make sure it aligns with your goals and financial situation, as such may change and evolve over time
- Provide tax-efficient investment management of your investment portfolio across different types of accounts, through portfolio design and asset class placement
- Seek to minimize risk via proper assessment of your tolerance for risk
- Monitoring of the investment portfolio and undertaking a systemic approach to portfolio rebalancing to maintain the portfolio’s asset allocation and overall risk exposures close to the desired ranges
- Adoption of factor-based investment strategies designed by your financial advisor or otherwise not provided to you via your existing qualified retirement plan or other account, for a portion of your portfolio, that seek to provide you with either a higher return, a lower level of portfolio volatility, or a combination of the foregoing
- Adoption of BlackSwan strategy for a portion of the portfolio, as implemented by your financial advisor, to seek to increase the long-term expected returns of your portfolio, and/or to seek to reduce risk exposures in the event of a major market downturn (such as might occur in an extreme economic recession or economic depression)
Design and implementation of an Investment Policy Statement, to document your asset allocation, and to have a plan for market value fluctuations, in order to avoid ad hoc portfolio changes that could lead to worse investment performance (see, e.g., SWAN ETF) - Excluding from retirement accounts specific industries or sectors to which you may possess risk exposures due to employment within those industries or sectors and/or holdings of concentrated stock positions within those industries
- Undertake behavioral coaching to counter known behavioral biases every investor possesses and/or to better secure for you a beneficial relationship with “money” and/or your accumulated wealth
- Assist you with Retirement Income Planning
- Identifying, based upon your needs and desires, when your “financial freedom” may be achieved (i.e., when you can retire from work, should you choose to do so)
Assisting with choice of retirement location, and with transitions into retirement, including assisting with development of new life purposes and means to accomplish those life purposes - Set up and maintain retirement account distributions to you from your portfolio as desired to meet your evolving needs and desires for income
- Advising on dynamic withdrawal strategies, in reaction to the ongoing performance of your investment portfolio, as well as any developments as to your goals and health
Advise and undertake appropriate income tax withholding at the time of retirement account distributions - Assist you in seeking to address risks relating to retirement portfolio decumulation planning, such as longevity risk / inflation risks, and sequence of returns risk
- Suggesting whether to, and when and how, to annuitize any portion of the portfolio to seek lifetime income protection
- Aggregate Required Minimum Distributions (RMDs) from IRA accounts and undertake from the appropriately chosen account
- Aggregate Required Minimum Distributions (RMDs) from different 403(b) accounts and undertake from the appropriately chosen account
- Undertake portfolio withdrawals by selecting accounts that provide for greater tax-efficient accumulation of wealth over the long term, or its transfer
- Ascertain whether distributions after separation from service, after age 55 but before age 59½, from a qualified retirement plan account (n/a to IRAs) may be desired
- Whether planning for 72(t) distributions (substantially equal periodic payments) may be desired prior to age 59½, from an IRA account (or accounts)
- Identifying, based upon your needs and desires, when your “financial freedom” may be achieved (i.e., when you can retire from work, should you choose to do so)
- Assist You with Your General Financial Planning
- Undertake financial planning with you that seeks to integrate investment portfolio management with your financial plan decisions in other areas
- Identify and seek to modify your cash flows (budget), and/or advising on plans for major expenditures over time to make more sound financial decisions
- Identify and implement various risk avoidance or minimization strategies, including use of different types of insurance, and planning for the appropriate types and amounts of insurance over time
- Design and/or monitoring of your estate plan, including coordination of your estate plan with accounts with beneficiary designations, seeking an efficient and effective management of your assets in the event of your incapacity and/or transfer or management of your assets upon the end of your lifetime
- Design and/or monitoring of your estate plan as a means of reducing estate taxes, gift taxes, generation-skipping transfer taxes, and/or inheritance taxes
- Planning for the future educational expenses of a child, grandchild, or other means, and identifying the most appropriate tax-efficient means to do so while considering potential impact on future financial aid awards
- Assist you with identifying and implementing strategies to maximize the utility of your Social Security retirement income
- Assist you with the selection of appropriate health care plans (including, at age 65, appropriate Medicare coverages for your situation)
- Assist you to analyze and plan for the receipt of pension benefits, and/or undertaking a lump sum distribution, considering other parts of your financial plan, any limits on pension protection existing under PBGC regulations, and any risks and options present
- Assist with Tax Reduction Strategies
- Ascertain whether any tax planning opportunities exist with employer stock held in the QRP (i.e., “NUA strategy” to be pursued)
- Ascertain whether, if client is to work post-age 73 (or 75), whether holding assets in QRP would benefit client as to avoiding or lowering RMDs during the period of work (IRA accounts don’t provide this option; also not available if you are 5% or greater owner of the employer)
- Ascertain whether Qualified Charitable Distributions, post-age 70½, are desired (can only be taken from traditional IRAs, not QRPs)
- Undertake asset location guidance to you, for your investments, to facilitate tax management techniques such as seeking long-term capital gain and qualified dividends treatment as well as securing foreign tax credits or deductions for assets held in taxable accounts, tax loss harvesting in taxable accounts, planning for a stepped-up basis, planning to harvest capital gains to take advantage of lower income tax brackets
- Taking additional distributions from tax-deferred accounts to take advantage of lower income tax brackets at opportune times
- Adjusting the location of investment assets among types of accounts to reflect any changes in your overall income and tax situation
- Ascertain opportunities to reduce income taxes through taking advantage of employee benefits, additional contributions to select types of retirement accounts, claiming other tax deductions or credits
- When and if appropriate, discuss with you the potential benefits of conversions to Roth IRA accounts for longer-term tax benefits
- Discuss ways to gift or bequeath to charities and/or to individuals from various types of accounts tax-efficiently, such as via gifts of low-basis securities to charities, Qualified Charitable Distributions (post-age 70½), and other techniques
- Monitoring prospective and actual changes in tax laws to seek to spot opportunities for tax reduction over time
- Additional Guidance from Your Financial Advisor
- Support from your financial advisor on understanding the potential impact of macroeconomic changes, and how to better navigate different market cycles
- Receiving additional guidance from your financial advisor on discerning and planning for the accomplishment of lifetime financial goals
- Possessing a trusted financial advisor
- Increasing your confidence levels about your financial decisions
Obtaining an objective analysis of your progress toward financial and life success, and/or achieving greater peace of mind
There are certainly other potential justifications for IRA rollovers. Please email me if you would like to suggest additions to this list. (Email: ron.rhoades@wku.edu).
One thing is certain … simply having a broader range of investment options is not sufficient to justify an IRA rollover.
However, possessing a sound investment strategy – one that cannot be replicated with the choices available within the qualified retirement plan, and that is solidly supported by academic research, sufficient back-testing, or both – is probably the most acceptable single reason to undertake an IRA rollover. And, as stated above, there are many other additional justifications, especially for those who provide (in addition to investment portfolio management) comprehensive and/or holistic financial planning.