FINRA Warns Firms Against Blind 401(k) to IRA Fund Transfer Recommendations

Attorney Advising Disclaimer

In one of its last acts of 2013, FINRA issued a year's end regulatory notice to member firms reminding them of firm responsibilities concerning rollovers to individual retirement accounts ("IRAs"), delineating guidelines and considerations for recommending transfer of assets from an employer-sponsored retirement plan to an IRA.

FINRA also emphasized the danger of potential conflicts of interest that could put investors at jeopardy and how firms and their brokers should "never be compromised by their financial interest in recommending an IRA rollover or another action."

FINRA Regulatory Notice 13-45: Rollovers to Individual Retirement Accounts

When a retirement plan participant leaves an employer, the four options generally presented include (1) leaving the money in the former employer's plan, if possible, (2) rolling over the assets to a new employer's plan, if applicable and permitted, (3) rolling over to an IRA or (4) cashing out the account value as a lump sum distribution, which may be costly for younger individuals as tax penalties will apply if the employee is below 59.5 years of age, allowing the distribution to be taxed as ordinary income.

This regulatory notice pertains to option (3) and IRAs, which account for 28% of all US retirement assets, totaling $19.5 trillion as of December 2012. Furthermore, nearly 98% of all IRAs with $25,000 or less are brokerage accounts. Rollovers from employer-sponsored retirement plans are the largest source of contributions to IRAs—almost 13 times the amount of direct contributions.

The decision to roll over plan assets to an IRA involves the consideration of several investment-related expenses, including plan or account fees such as sales loads, commissions, administrative and custodial fees, etc. Investment related services may incur fees as well. Rolling over appreciated employer stock, for instance, may produce negative consequences, such as concentration-related risk and an ordinary income tax rate upon distribution.

The aforementioned expenses—namely commissions or other fees—may be an incentive for brokers and financial advisers that poses a conflict of interest. For instance, commissions for brokers and asset-based fees for advisers for rolling over into an IRA may be much higher—and therefore more attractive for those financial stakeholders—than selecting option 2, rolling the assets into a new employer's plan.

FINRA states the conflict of interest issue quite bluntly: "A financial adviser has an economic incentive to encourage an investor to roll plan assets into an IRA that he will represent as either a broker-dealer or an investment adviser representative."

Similarly, a firm associate "has an incentive to encourage participants to open IRAs rather than maintain their assets in their plan."

To safeguard against undue conflicts, FINRA reminds firms to adequately supervise retirement services activities, including via the establishment and maintenance of appropriate policies and procedures, including written supervisory procedures ("WSPs")—best practices pertaining to recommendations, suitability and fair dealing in compliance with applicable securities laws and FINRA rules.

Lastly, FINRA cautioned firms against allowing educational information programs and distributions to turn into IRA sales recommendations or solicitations. Firms have an obligation to train registered representatives to evaluate suitability and recommend a rollover to an IRA only when proper and financially sound.

FINRA vowed to make the recommendation and marketing of IRA rollovers an "examination priority" in 2014.

If you have invested with a FINRA member firm or broker/adviser whose IRA rollover or other securities recommendation has not been in your best interests, has been unsuitable, a conflict of interest or otherwise illicit and has proven harmful to your investments, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881.

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