Never Assume: Why Retirees Must Be Cautious With 401(k) Rollovers Now

Understanding the Impact of the 401(k) Rollover Rule Change

The recent changes to the U.S. Department of Labor’s 2024 Retirement Security Rule have created uncertainty for individuals looking to roll over their retirement funds. This rule, which previously required financial advisers to operate under a fiduciary standard when offering one-time recommendations like 401(k) rollovers or annuity purchases, was recently struck down by a Texas court. As a result, many financial professionals may no longer be obligated to act as fiduciaries, making it more difficult for consumers to receive unbiased advice.

This development has sparked concern among experts and retirees alike. According to Andrew Dorado, senior counsel at Liebert Cassidy Whitmore, “Americans with retirement accounts should not assume all advice is subject to a consistent fiduciary standard.” This means that individuals must take a more active role in verifying the integrity of the advice they receive.

What This Means for You

For individuals managing their retirement savings, this change underscores the importance of being proactive and informed. Evan H. Farr, a certified elder law attorney at Farr Law Firm, emphasizes that “do not rely on labels [titles like financial adviser and fiduciary can be misleading], instead rely on written questions and documentation.” He recommends asking specific questions to determine whether the professional is acting as a fiduciary for the recommendation, how they are paid, and if they receive commissions or third-party payments.

Cesar Vazquez Jr., vice president and senior retirement plan consultant at Tompkins Financial Advisors, notes that while it may be easier for savers to access professional advice without the previous stringent documentation requirements, there are new challenges. Advisers will no longer need to formally justify their recommendations, which could lead to higher commission and conflict of interest sales that were previously banned.

Key Considerations When Choosing an Adviser

When dealing with 401(k)s or other retirement plans containing stocks, ETFs, mutual funds, or other equities, Nancy Hite, a certified financial planner at The Strategic Wealth Advisor, advises avoiding those who only hold an insurance license. “Stocks, ETFs and mutual funds are securities, and insurance agents are not trained to evaluate or make investment decisions on securities,” she explains. Many life insurance agents lack the expertise needed to provide sound advice on these types of investments.

David Lau, CEO of DPL Financial Partners, highlights the complexity of navigating retirement planning. “Getting sound, fiduciary advice from a well-trained professional as you approach or begin retirement can be the difference between enjoying the retirement you’ve envisioned and enduring ongoing financial stress during your golden years.”

Always Ask About Fiduciary Status

Yehuda Tropper at Beca Life Settlements stresses the importance of asking for clarity regarding an adviser’s fiduciary status. “Consumers should never assume an adviser is a fiduciary. Instead, you can ask, in writing, whether an adviser is acting as a fiduciary for all of your accounts, 100% of the time.” He also recommends asking for a clear breakdown of how the adviser is compensated to identify any hidden fees.

Cesar Vazquez adds that understanding how an adviser is paid is crucial. “Are they paid a salary or do they earn a commission on products? You should also ask what are alternative options for low-cost, advice-free investing.”

Evan Farr emphasizes the importance of specific inquiries. “Ask why they recommend a specific account type. Why did you recommend this product? What is my all-in annual cost? Were there any lower cost alternatives you evaluated? What happens if I do nothing?” The last question is especially important, as many bad retirement recommendations are not outright scams but costly exchanges presented as upgrades.

Finding Reliable Fiduciary Advisers

According to David Lau, the most straightforward path is to seek out a Certified Financial Planner (CFP) professional or another fiduciary. “Because CFP certification requires a fiduciary standard of care at all times, these advisers are ethically bound to act in your best interests.” There are over 100,000 CFP professionals available, providing numerous options for individuals seeking reliable guidance.

By taking the time to ask the right questions and verify an adviser’s fiduciary status, individuals can better protect their retirement savings and ensure they receive advice that aligns with their financial goals.