In this Section:

The Evolution of Rollover Advising

The IRA rollover market is facing tremendous pressure at the same time it offers unprecedented business opportunity.

Advisors like Juli McNeely know that the key to unlocking the opportunity is to think bigger than the rollover.

McNeely Financial Services in Spencer, Wis., is leaning more toward fee-based advising and comprehensive planning. That means a bigger time investment and incorporating things well beyond a simple investment plan — such as health care costs and long-term budgeting.

“Our clients are just really happy with the peace of mind they have that everything has been considered and it’s not just a quick decision,” said company president McNeely. “There are so many things that really play into individual retirement planning right now. I can’t see how it can be successfully done without that comprehensive planning.”

According to LIMRA projections, the “retirement income opportunity” market is expected to soar to $15.1 trillion by the year 2023. IRAs currently hold $7.3 trillion, representing 30 percent of U.S. total retirement market assets. That compares with 18 percent two decades ago.

So what’s the problem? Several, actually, as regulators, market forces and client expectations are all evolving along with the rollover market.

Some of what now passes for “best practices” might not work for agents and advisors going forward, for a variety of reasons.

Cerulli Associates concluded in a recent report that providers, asset managers and advisors who participate in the retirement market “will be impacted in myriad ways” by outside forces.

“Advisors accustomed to parlaying defined contribution plan assets into traditional wealth management relationships via IRA rollovers face new obstacles,” associate analyst Dan Cook wrote in the report.

A client-centered approach is going to win IRA rollover business in the new paradigm, analysts say. At McNeely, that means prospecting with a light touch.

McNeely Financial hosts a variety of social events designed with no goal in mind other than for clients and guests to have fun. The company hosts experts in topics of interest to clients, such as trapshooting, for an evening of light fun.

“We try to make it very easy for our clients to introduce us to other people,” McNeely said. “We do ladies’ nights and men’s nights, and we try to isolate them by the topic we try to do. But they’re never financial events.”

Challenges to Face

Nine out of 10 new IRA accounts are rollovers, according to the Investment Company Institute (ICI).

The President’s Council of Economic Advisers estimates that $300 billion is rolled over annually, a figure that is only growing.

Some of the challenges facing advisors hoping to capture some of the bulging rollover market include:

  • Better Planning: Clients are exposed to a variety of financial planning possibilities these days, from roboadvisors to traditional advisors to self-management. Studies show clients want human interaction with a professional, but one who is well-versed in retirement, health care and financial planning.
  • Regulation: While the Department of Labor’s fiduciary rule might not survive long under President Donald J. Trump, it won’t be going away soon. And the momentum for a fiduciary standard has proven stubbornly persistent through Republican and Democratic administrations.
  • More Licensing/Training: The best way for agents and advisors to protect themselves from liability and offer complete financial planning is through more education. The questions then become what licenses to pursue and what training is best.
  • Avoid Common Rollover Mistakes: With so much more attention being paid to the trillions of dollars at stake with the retiring boomer generation, IRA experts say agents and advisors cannot afford to be lazy or sloppy. The costs are sure to be much higher than the rewards.

In or Out?

The new fiduciary regulation threat is the most pressing — and unsettled — issue facing advisors, Cerulli analysts say.

The prospect of tightened compliance will force advisors and their broker/dealers (B/Ds) to evaluate whether it is worth the additional time, effort and fiduciary liability to continue pursuing rollover assets, Cerulli concluded.

“Cerulli asserts that the hurdles that the DOL conflict of interest rule creates will force another round of ‘in or out’ for the population of advisors operating in the employer-sponsored retirement plan market,” said Jessica Sclafani, associate director.

“Some advisors will be mandated by their B/D or wirehouse to choose between [defined contribution] plan business and traditional wealth management rather than operate in both channels,” she added.

Retirement specialist advisors, who generate a majority of their revenue from employer-sponsored retirement plans, are best-positioned because they are well-versed in trends impacting the retirement market, Cerulli said. Those advisors are mostly accustomed to acting in a fiduciary capacity for DC plan sponsors.

Some advisors without retirement plan expertise will find the regulatory environment prohibitive and exit this market, Cerulli predicted. However, the remaining advisor population will have to build specialized knowledge of the market if they intend to continue servicing DC plans.

This need for specialization creates opportunity for DC investment-only (DCIO) asset managers and outsourced fiduciary providers, such as Mesirow and Morningstar, to support advisors who are interested in growing their DC plan business but lack the expertise.

“Cerulli expects that advisors will increasingly turn to fiduciary outsourcing providers either because their B/Ds prohibit them from acting in a fiduciary capacity or because they lack the appetite or ability to take on the greater fiduciary responsibility currently set forth under the new regulation,” Cook explained.

Comprehensive Planning

With regulators looming, rollover strategies that do not provide demonstrable benefits to clients are in the crosshairs. Meanwhile, retirees are faced with growing financial pressures that come with increased longevity and skyrocketing health care bills.

The answer to both client and advisor problems could be the same: holistic planning services. Agents and advisors who expand their scope and provide interdependent planning are going to adapt well to the future, analysts say.

That means not only recommending investments but also projecting outcomes that marry investments to savings with other sources of retirement income, such as Social Security or pensions. And then factoring in living costs, health care expenses and even legacy planning.

Eighty-one percent of respondents to a 2014 survey by the Certified Financial Planner Board of Standards said they would rather work with an advisor who integrates all areas of their financial life than with someone who specializes in one or two areas.

The study, conducted by ORC International, surveyed consumers with more than $100,000 in investable assets.

The process is usually the same for every client, McNeely said, starting with identifying how much money they need now and how much they’ll need in the future.

Laddering is a common strategy for IRA rollover retirement planning, and one McNeely relies on where applicable. Structuring retirement income that includes things like delaying Social Security and sinking a chunk of money into a deferred income annuity creates a diversified portfolio that protects the client, she said.

“There’s no cookie-cutter approach in this,” McNeely said. “Everyone is a little bit different.”

This type of holistic planning helps build trust and a deeper relationship with the client, McNeely said. Sometimes it means playing bad cop, usually when a client is overspending their plan. But not always.

“I do have clients who save their entire life, and they continue to save even in retirement,” she said. “They have not flipped the switch to now we’re going to spend the assets. I have had conversations with clients, saying ‘You do have the ability to spend more.’ It does happen.”


Gaining the Skills

In the same CFP survey, 66 percent of investors said they would be “very concerned” if their advisor had not been given any formal training in comprehensive personal financial planning, to the point where they’d seek another advisor.

In the new world of holistic planning, an advisor is likely to see an eclectic range of issues. More importantly, advisors will need a wide range of knowledge and skills to best serve their clients.

One person might have clients with a trust fund who need tax advice incorporated into their plan. Another person might be caring for an elderly parent and need Medicare and estate planning knowledge. And on and on.

McNeely engages with a sort of support group to share ideas. If one advisor is faced with a new situation brought by their client, maybe another member of the group has more experience and strategies to share.

She also takes continuing education classes.

“The additional education I’ve received allowed me to be that more comprehensive advisor,” she said. “For example, taxation. I’m not a CPA, but I understand taxation a lot better now that I’ve taken the courses.”

David Royer, national sales director of Guaranty Income Life, is a nationally recognized IRA rollover expert who teaches courses in using tax rules to maximize rollover benefits.

“The market is gigantic, and it’s growing at a very fast rate,” Royer said. “Here’s what happens almost 100 percent of the time: The retiring employee asks whoever they are dealing with in HR, ‘What do I have to do about my 401(k)?’

“And almost 100 percent of the time, the HR person says, ‘You don’t have to do anything. You can leave it where it is.’ So they do.”

Nearly all clients can be separated into one of two categories, he said. The “accredited investor” comes with at least a working knowledge of various investment strategies.

“For that person, you can get as complicated as you want,” Royer said.

But the typical small saver whom most agents and advisors deal with will not possess that level of investment understanding. That’s why acquiring additional licensing and education is crucially important, Royer said.

“This is all about knowledge,” he added. “I would recommend to all of the agents out there, learn as much as you can.”

Changing the Standard

Unless the Trump administration effectively blocks implementation, the DOL fiduciary standard begins taking effect April 10. With everything on the new president’s change agenda, the DOL rule doesn’t appear to be a high priority.

After all, he never mentioned it during the campaign. A Trump surrogate has said the rule will be dumped.

Even if it is, many in the industry are migrating toward a fiduciary standard anyway.

“We’re really taking each client on a case-by-case basis,” McNeely said. “We’re still moving forward. We are going to have some conversations with some clients about moving to a fee-based model.”

Despite a political environment that favors elimination of the DOL rule, many are hesitating because it isn’t a one-party or one-person agenda.

The rule was first put forth during President George W. Bush’s administration, and the Securities and Exchange Commission is working on its own version.

Speculation is making the rounds that regulators will agree on a standard that falls somewhere between suitability and fiduciary responsibility.

At stake for agents and advisors is heightened liability tied to the recommendations they make with clients’ money. Pressure is growing from several stakeholders (including the fee-only sector) to hold anyone making investment recommendations to a “best interest” standard.

As long as the fiduciary rule remains, advisors will have to consider these general guidelines when doing rollovers:

  • Sell under the full best interest contract exemption. This means significant recordkeeping and disclosures, as well as a signed contract agreeing to act in the client’s “best interest.”
  • Sell under the “level-fee fiduciary” exemption, which is a much less burdensome version of the full BIC exemption. An LFF receives only an advisory fee and no additional compensation.
  • Sell under Prohibited Transaction Exemption 84-24 if a fixed-rate annuity contract is part of the rollover plan. This is a much less burdensome hurdle, but the advisor still agrees to act in the best interest of the client.

Regardless of what happens, agents and advisors should always adhere to a best interest standard, she added.

“Sometimes I shake my head and say, ‘Why did someone put you in this product? Because you’re going to be locked in for 10 years, or you’re going to have a high surrender charge,’” McNeely said. “No one wants to hurt a client at a time when they’re supposed to be having the time of their life.”

Source-of-Funds Rule

Insurance-only agents also need to be wary of the source-of-funds rules, Royer said.

The source-of-funds issue refers to emerging regulatory requirements concerning what advice insurance and financial advisors can give to consumers. The shorthand version is that if you’re not licensed to sell an insurance or securities product, don’t give specific personal advice to consumers about that product.

Ongoing debate over the source-of-funds rule has evolved into a turf war between Wall Street and the insurance industry, Royer said.

Current standards are generally traced to an Iowa bulletin in 2011. In the financial area, the bulletin says it is “permissible” for insurance-only agents to discuss general information.

Examples include general discussions about balancing risk and diversification, and discussion with consumers about their risk tolerance, financial situation and needs and about the stock market in general terms. Also permissible is discussion that provides advice about insurance products as part of a financial plan.

But client-specific advice involving securities is prohibited. Examples include discussing risks specific to a consumer’s individual securities portfolio and providing advice regarding the consumer’s specific securities or the securities’ investment performance.

Insurance-only agents must disclose that they are insurance agents and are authorized to sell insurance.

Regulators do go after source-of-funds violators. Two agents in Arkansas were investigated and fined by the state securities department in 2014 for sales activities in a Social Security seminar where a fixed indexed annuity was sold to a senior.

Among other things, the regulators had charged that the agents provided “investment advice” without proper securities registration, and that the agents had commented on the customer’s specific securities holdings.

Mistakes to Avoid

Royer is closing in on 50 years in the financial services industry. In 2004, he developed “The Keys to the IRA Kingdom,” a course in which he teaches advisors how to get the most out of an IRA for their clients.

He preaches helping IRA owners avoid mistakes that could cost them valuable funds for retirement. A few important common mistakes:

1. Not taking advantage of the “stretch” IRA option.

In 2002, the IRS changed the tax and distribution rules, in part to help prevent owners of retirement plans from outliving their retirement savings. These new rules also created an income planning opportunity that would allow the taxes on IRA distributions to be spread over three generations.

Learning the details is a must for advisors, Royer said.

“Now a modest IRA can generate a lifetime of income that can span over three generations,” he writes. “This is one of the biggest gold nuggets in the tax code.”

2. Not properly designating beneficiaries.

While it would seem that choosing who will inherit the money left in an IRA would be simple, Royer said it isn’t. The reality is that many children and grandchildren who inherit a qualified plan will be forced into rapid distribution, causing rapid taxation, due to beneficiary mistakes.

3. Not taking advantage of tax-saving strategies.

Two strategies can transform taxable IRAs into tax-free income or a tax-free inheritance, and agents and advisors need to know them. Proper use of a Roth IRA conversion or IRA arbitrage can equate to substantial tax savings for clients, Royer said.

‘You Have to Show Why It’s Better’

Ed Slott has more than 20 years of teaching agents and advisors the arcane rules and practices associated with IRA rollovers. He has a simple Golden Rule: “If it’s in the client’s best interest, it’s always in your best interest as an advisor.”

Regardless of regulatory outcomes, Slott is convinced that accountability is here to stay.

“There’s still going to be accountability if you are making the wrong recommendations because you didn’t know how many options there were and what factors to consider with each option,” he said. “That’s something you have to be educated on. It can’t just be ‘Let’s do an IRA rollover because it’s better for me as an advisor.’ You have to show why it’s better for them as a consumer.”

Although there are six options for plan funds — IRA rollover, leave in plan, roll to new company plan, take lump sum, Roth IRA conversion, or in-plan Roth conversion — Slott focuses on just two.

“Basically, it comes down to leave it in the company plan or roll it to an IRA,” he explained. “The other options are just offshoots of that.”

While taxes, regulations and investment options are the big things advisors need to be aware of, they are not the only factors in play.

For example, creditor protection. IRAs have bankruptcy protection under federal law, but state laws vary.

“It’s imperative for any advisor to know his own state’s creditor protection statute,” Slott said. “That’s important. You don’t want to get caught on this one.”

Likewise, the rules forbid life insurance and loans from an IRA. Clients who have either need to know their options in detail, Slott said.

“What I would tell a client is ‘If you have life insurance in the plan, you may want to leave it in the plan,’” he added. “They might say, ‘That’s not an issue. I’ll cash out the life insurance and move everything over into an IRA.’ But you have to ask.”

Education on these and other issues will prove crucial to taking advantage of what is a bulging IRA rollover market, Slott said.

“They can take the high road, or the proactive road, and learn this stuff,” he said. “Then they’ll be in position to have a tremendous edge.”


2017 IRA Rules Changes

Agents and advisors who work with retirement accounts are seeing rules changes beyond the Department of Labor fiduciary rule. Several other tweaks and changes took effect Jan. 1. They include:

• Higher Social Security taxes for high earners. The ceiling for earnings subjected to Social Security taxes jumped from $118,500 to $127,200 in 2017. That translates to 12 million additional workers paying more into the system. Earnings that exceed the taxable maximum are not taxed by Social Security or used to calculate retirement payments.

• Higher secondary IRA income limits. For those who contribute tax-deferred income to a 401(k) plan, the ability to make similar contributions to an IRA is phased out for individuals earning $62,000 to $72,000 ($99,000 to $119,000 for couples), up $1,000 from 2016. For those who don't have a 401(k) but have a spouse who does, the tax deduction is phased out if the couple's income is $186,000 to $196,000. Those who do not have a 401(k) or other type of retirement account at work can make tax-deferred IRA contributions regardless of their current income.

• Higher income thresholds for Roth IRAs. Income limits for those wishing to contribute to a Roth IRA were increased by $1,000 for an individual and $2,000 for couples. Roth IRA contributions are phased out for those earning between $118,000 and $133,000, or $186,000 to $196,000 for couples.

• Income eligibility for the Saver’s Credit is increased slightly. The income limits for the so-called Saver’s Credit are being increased by a modest $250. That means anyone earning less than $31,000 in 2017 could qualify for a tax credit worth between 10 and 50 percent of 401(k) and IRA contributions up to $2,000. For couples, the figures are $62,000 in earnings and contributions up to $4,000.

• Early account withdrawals for Hurricane Matthew victims. Hurricane survivors in North Carolina, South Carolina, Georgia and Florida can take IRA withdrawals and loans. Likewise, the six-month ban on 401(k) contributions after a hardship distribution will not apply to hurricane-related distributions taken between Oct. 4, 2016 (Oct. 3 in Florida) and March 15, 2017. Distributions could still trigger income tax and a 10 percent early withdrawal penalty, and a 401(k) loan must be paid back within five years or upon leaving the job to avoid taxes and penalties on the outstanding balance of the loan.


InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].

More from InsuranceNewsNet