Take charge of your 401(k) rollover

In preparing to retire, you’ve notified HR that you’re closing your 401(k) account and doing a rollover to move your assets into an individual retirement account (IRA) to preserve their tax-deferred status.

If you’re a physician working for a large hospital or a healthcare company, you’ve probably accumulated a substantial account over the years, and you want to handle it with great care.

On one of your last days at work, you get a phone call. Caller ID shows it’s from the financial firm that holds your 401(k) account. Before you pick up, you should be aware that how you handle this call and any ensuing communications with the firm could ultimately have a big impact on your retirement resources.

This call signals a decision point for more and more baby boomers on the cusp of retirement. By November of 2020, the number of retired Americans had increased that year by 3.2 million—a far greater increase already that year than in any of the eight preceding years, according to a study by the Pew Research Center. As 59% of employed Americans have a company 401(k) plan, with those age 60 to 69 annually contributing about 11.4% of their earnings, achieving an optimal rollover outcome is a critical issue for millions. And it’s nonetheless critical for high-earning physicians who want to maximize their retirement resources.

The phone is still ringing, so you answer. As it turns out, the call isn’t someone in the firm’s retirement plan division. Rather, it’s from an individual who identifies himself or herself as an FA (financial advisor) with the same firm, offering assistance with your rollover and advice on managing your assets once they’re tucked inside an IRA.

Clearly, the caller wants to keep your assets with the firm, and there’s nothing inherently wrong with this. But there’s definitely something wrong with the self-dealing that some financial firms engage in when advising new retirees on what to do with rolled-over assets. Some advisors steer them into investments recommended to serve the firm’s interests, rather than their clients’.

Depending on how far such practices go and the level of disclosure involved, they may not be just unethical. They may also be illegal—violating various securities regulations, including those of the Employment Retirement Income Security Act (ERISA). This law requires what’s known as a fiduciary standard, requiring instituions to put clients’ interests ahead of their own and prohibiting various transactions that may be used for self-dealing.

The investments that some unethical firms recommend include high-cost mutual funds managed by the same firm, risky derivative-based products, inadvisable annuities and stock trades directed to the company’s own brokerage for high commissions. This can disadvantage retirees who automatically say “yes” because it can mean choices that ultimately produce lower net investment returns while introducing more risk.

Unethical or illegal practices in rollover scenarios have been in a national spotlight in recent years, as the federal regulators and aggrieved clients have brought litigation against large financial services companies.

As 401(k) plan sponsors, employers are also held to afiduciary standard, and they’re required to protect employees from excessive fees. But when retirees cross the threshold from a company 401(k) plan to their own IRA, employers are no longer involved. Thus, people doing rollovers upon retiring no longer benefit from the sometimes paternalistic oversight of employers who stand between financial firms and their employees.

Moreover, many of these company plans don’t have a lot of investment options compared with IRAs, which have far more flexibility. This means retirees doing rollovers are faced with more choices.

If you’re uncertain about the ethical fiber of the company involved—or you just want to keep all your options open—you can just refuse, telling the phoning advisor that you’re not interested and making other plans.

Then you can make some. One route is to do an IRA rollover to the institution of your choice—not necessary the firm that held your 401(k)--and then manage these assets yourself. But depending on your level of financial knowledge, the DIY route may not be your best option.

Another route is to find an ethical, well-recommended advisor to handle the rollover and advise you on managing the assets within your new IRA. If you have other accounts, the advisor might be able to consolidate them for more effective management. Choosing an advisor can be a daunting task, but it’s worth the effort.

You may need a financial planner—especially if, like many individuals, you’ve reached retirement without a financial plan. A planner can formulate a custom financial blueprint to suit your situation, make periodic adjustments in it and keep you on track to follow your plan.

But if you have substantial assets and various retirement income streams, you might instead need a wealth manager. This is a professional who offers not just financial planning and general investment advice, but also provides a full range of advisory services on just about any financial matter, including investment management, cash-flow analysis, real estate advice, guidance on equity in a privately owned business, estate planning (including trusts) and charitable giving.

Regardless of which type of advisor you choose, you want one without conflicts of interest to serves your interests ahead of their own. That means you need a real advisor, not, like many so-called advisors, a salesperson.

David Robinson, a Certified Financial Planner, is founder/CEO of RTS Private Wealth Management, an SEC-registered firm in Phoenix that provides fiduciary services to help clients achieve their financial goals. His practice focuses on helping wealthy individuals with custom financial plans and using a holistic approach to grow/protect wealth, manage taxes, identify insurance solutions, prepare for retirement and manage estate plans.