Be Thoughtful Before You Recommend Rollovers or Transfers to IRAs

April 23, 2014

I think we're all familiar with the old adage: "Measure twice, and cut once."

I have practiced this when performing carpentry work around my house. Sometimes I even measure three times before I cut to minimize mistakes. I think this methodical approach to carpentry work lends itself to how advisors should determine whether to recommend a rollover or transfer of a client's qualified plan assets to an IRA. Information in this blog might not only help your client, but may also help you better comply with rules that FINRA has indicated will be an examination priority in 2014.

Under FINRA Regulatory Notice 13-45, certain responsibilities to clients exist when (1) recommending a rollover or transfer of assets in an employer-sponsored retirement plan to an IRA or (2) marketing IRAs and associated services. Recommendations to sell securities in a plan (e.g., for purposes of a rollover or transfer) or to purchase securities for a newly opened IRA are subject to FINRA Rule 2111. Under Rule 2111, one must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security is suitable for the customer.

Although the Notice can apply to a broad range of circumstances, it focuses on situations in which participants in employer-sponsored 401(k) retirement plans terminated employment and must now decide how to invest plan assets. The Notice emphasizes that conducting a rollover or transfer to an IRA may not always be a suitable recommendation for participants under FINRA Rule 2111. Specifically, any IRA rollover or transfer decision must take into account various factors included in, but not limited to, the table below.

Potential Factors to Evaluate Why It Could Matter
Investment Options An investor who is satisfied by the low-cost institutional funds available in some plans may not regard an IRA’s broader array of investments as an important factor.
Fees and Expenses Some employers may pay for some or all of a qualified plan's administrative expenses while all of an IRA’s account fees would be paid by the IRA owner.
Services Offered Evaluate level of service offered by a qualified plan administrator versus any suggested IRA provider.
Availability of Tax Penalty-Free Withdrawals An employee who separates from service and is age 55 or older may be able to take tax penalty-free withdrawals from a qualified plan. In an IRA, tax penalty-free withdrawals are generally not permitted until age 59½ unless another exception applies (e.g., disability, life expectancy payments, etc.).
Need for Access to Loans A qualified plan may permit loans while IRAs do not.
Creditor Protection Concerns Generally, plan assets have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. Outside of bankruptcy, IRAs may be afforded more or less protection depending on applicable state law. Always confirm with legal and tax advisors in your client's state if these issues arise.
Timing of Required Minimum Distributions (RMDs) A participant still working at age 70½ is generally not required to take an RMD from a qualified plan versus the inability to further delay an RMD with an IRA regardless of participant’s employment status. Note that a 5% or more owner of a business that sponsors a qualified plan would have the same RMD requirements as an IRA.
Net Unrealized Appreciation (NUA) Opportunities Evaluate any negative tax consequences of rolling appreciated employer stock to an IRA versus distributing the stock to a nonqualified account.
Other Factors Keep in mind that this is not an exhaustive list and other factors not discussed here may come into play when determining whether to recommend any rollover or transfer to an IRA.

Be Aware of Conflicts

Also keep in mind that FINRA will be monitoring firm practices surrounding conflicts of interest that may impair the judgment of a registered representative or another associated person about what is in the customer's best interests. For example, a conflict of interest may exist when an advisor recommends sending assets to an IRA because the advisor could have a financial incentive to recommend an investor roll plan assets into an IRA (e.g., an advisor could earn a commission versus not earning a commission for assets retained by the participant’s current plan). Always work with your broker/dealer to confirm whether any type of rollover or transfer recommendation to an IRA meets FINRA standards.


Here at Pacific Life's Retirement Strategies Group, we have the resources and support that can help you and your clients evaluate rollover and deferral opportunities for clients' retirement accounts as well as the beneficiaries on these accounts.

For more ideas and information to help you as you manage your clients' retirement assets and rollover opportunities, contact the Retirement Strategies Group at (800) 722-2333, ext. 3939, or send e-mail to

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