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401(k) rollovers lose billions due to conflicts of interest

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John Wilcox

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in Compensation and Benefits,Human Resources

American workers who rollover 401(k) retirement savings into individual retirement accounts lose at least $8 billion per year because of conflicts of interest created by financial advisors’ reliance on commissions, according to a new Department of Labor (DOL) report.

The problem: Employees who change jobs, often turn to financial advisors to make recommendations on how to invest 401(k) balances and handle the complex task of transferring them into IRAs. Those advisors are often compensated through fees and commissions paid by the investment funds they recommend.

The White House has directed the DOL to draft new rules requiring investment advisors to follow a “fiduciary standard” that would put clients’ interests first and disclose any conflicts of interest. The DOL is on point on the issue because it enforces the Employee Retirement Income Security Act.

Total losses from conflicts of interest could cost more than $17 billion per year, according to the report, titled “The Effects of Conflicted Investment Advice on Retirement Savings.”

Rollovers from defined-contribution retirement funds into IRAs topped $300 billion in 2012. “The overwhelming majority of money flowing into IRAs comes from rollovers from an employer-based retirement plan, not direct IRA contributions,” the report states.

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Mark Zoril April 8, 2015 at 10:39 pm

It is no secret (or is it?) that many adviser’s and financial services firms view transfers of assets out of employer based retirement plans as a financial bonanza. Especially for the employees that are closest to retirement with the larger account balances. In fact, many firms encourage their advisers to target employees over the age of 59 1/2 who participate in plans that allow for in-service withdrawals. This can be a great source of revenue and commissions.

However, it is worth noting that many pure “fiduciaries” have a very strong incentive, maybe even more so than brokers, to capture asset transfers from retirement plans. So, it is not just commissions that create this conflict of interest. Many “fee only” advisers are comped by gathering assets and charging their clients a percentage of assets under management. These program fees can be significant and certainly create an environment where a fiduciary adviser, who is supposed to be acting in the best interest of the client, has a very strong financial incentive to promote the benefits of their investment plan. In many cases, these investment plans, even though promoted by “fiduciary advisers” are far more expensive than some of the employer based plans that the employees may be participating in to begin with. Their conflict of interest can be just as damaging to the employees as the obvious conflict of interest of the commission-based adviser. Something to think about.


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