IRA rollovers: what to watch out for - and how to avoid the sharks

By Beth Pinsker

A new Department of Labor rule, which goes into effect in September, requires that anyone who offers advice about rollovers to be a fiduciary

Dear Fix My Portfolio,

I'm 62 and have approximately $2 million in an IRA - the result of a career's worth of rollovers from past jobs.

In my current employer's 401(k) plan, I have another $200,000 right now. I'm getting ready to retire and I'm wondering, should I roll all of my IRA money into my current employer's 401(k) plan before I retire?

I'm not concerned about investment opportunities as the 401(k) menu is fine for creating a diversified portfolio. To roll or not to roll - that is my question. Who should I ask for advice to make sure I'm covered?

Rolling Over

Dear Rolling,

If your IRA and 401(k) both have satisfactory investment options for you, it doesn't matter which account you keep your funds in. There are lots of complications you can fuss over when it comes to the location and management of your retirement nest egg, but this doesn't have to be one of them. Rollovers are usually a pretty straightforward financial transaction, and it doesn't take more than a few clicks to get them done.

A new Department of Labor rule, which goes into effect in September, requires anyone who offers advice about rollovers to be a fiduciary. That means that anyone who helps you consider what to do, even if it's just a one-time consultation, needs to be working in your best interest and not be conflicted by commissions or other financial concerns of their own.

The effect of this is intended to, as financial planner David Johnston puts it, "keep the sharks from circling in the water."

An adviser earning commissions or sales prizes could try to direct you to move your money into some kind of investment that would benefit them instead of you. This could come in all sorts of forms, like fixed index annuities, indexed universal-life policies or variable life insurance, to name just a few of the types that are aggressively marketed.

None of these investments are inherently bad, they just aren't suitable for every consumer. Most people don't have the financial background to understand their complicated terms and they end up with their money locked into products without understanding the initial fees, the surrender charges and other conditions. The Council of Economic Advisers says that the new rule will prevent consumers from wasting $5 billion a year because of conflicted advice.

"There are always bad actors out there," adds Johnston, who is managing partner at Amwell Ridge Wealth Management in Flemington, N.J. "It all comes down to how you define 'adviser.' Anyone can hang a shingle out there, but there are only a few designations that are properly licensed for investment advice."

The opposite of getting conflicted advice is to speak to a fiduciary who is bound by ethics to put their customers best interests first, like a certified financial planner (CFP) or a chartered financial analyst (CFA). These advisers will be able to look at your financial situation and help you decide the right move for your money.

Johnston does this regularly for clients who ask about rollovers. When I spoke to him, he had just gotten off a call with a client who had four old employer 401(k) accounts scattered in the financial universe, and one IRA, and wanted to know whether he should roll them all together. Because he is a fiduciary, Johnston first assesses the different plans to see if there are any cost or opportunity differentials that would outweigh the benefit of consolidation. He didn't see any, so he was comfortable making the recommendation that the client should merge all his accounts into one, and then set him off with instructions on how to do it.

Those instructions are pretty simple, to be honest. There's really not much reason you would need any advice on the actual logistics of a rollover from a fiduciary, or anyone. Most people just let it go out of procrastination, not because it's a monumentally difficult task. You either call the plan administrator or logon onto the account you want to move, indicate that you want to initiate a rollover, then tell them the destination. You can also call or log into the destination account and have that company initiate the transfers if you give them the information about the accounts you want to roll there.

It might seem more difficult to decide how to invest the funds once the transaction is complete, but your default here can be easy too. You can usually just invest the funds the same way they were before and just keep going. You can also consult an online tool like a robo adviser, which can give you investment suggestions based on how you answer questions about your risk tolerance and life situation. Rollovers should be little more than an administrative hiccup and you keep going on your way.

If you're looking for more help than that, what you're really talking about is making a holistic financial plan. To do that properly, you definitely want somebody acting in your best interest. Be very aware, however, that not all representatives you encounter at a financial institution like a bank or brokerage account will have a fiduciary designation, and may instead have a securities license like a Series 7 that allows them to handle your money.

Before you engage a fiduciary, make sure that your finances make sense for the fees involved. If you have $2.2 million and you hire a financial adviser who charges 1% annually, that's going to cost you $22,000 a year. You may want to consider what you can do on your own first, or with a limited, flat-fee or per-hour engagement. You can always trust that you're going to act in your own best interest, and you don't need a government rule to mandate that.

Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put "Fix My Portfolio" in the subject line.

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-Beth Pinsker

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04-27-24 0715ET

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