FINRA Issues Rollover IRA Regulatory Notice



For advisors, helping clients move money into individual retirement accounts (IRAs) from a defined contribution plan is fraught with important tax decisions, potential conflicts of interest and suitability considerations.

Financial Industry Regulatory Authority (FINRA) has posted a reminder of the pitfalls of rollovers by posting Regulatory Notice 13-45 on its website.

FINRA says in a news release that the notice “addresses firms’ recommendations to participants in employer-sponsored 401(k) retirement plans who terminate their employment and must determine how to invest their plan assets.”

Retirement plan participants who part with an employer have four options: leave the money with the former employer’s plan, roll over assets to the new employer’s plan, roll over the assets into an IRA, or cash out the account value.

Notice 13-45 delves into some of the conflicts of interest surrounding commissions and fees earned by intermediaries.

Advisors who recommend that investors roll over plan assets from a defined contribution (DC) plan to an IRA may earn an asset-based fee, FINRA points out. Advisors who tell clients to keep assets in a retirement plan sponsored by the client’s former employer do not receive any compensation.

“Thus, a financial advisor has an economic incentive to encourage an investor to roll plan assets in an IRA that he will represent as either a broker/dealer or an investment advisor representative,” FINRA said in the notice.

“Conflicts also may exist for firms and their associated persons that are responsible for educating plan participants about their choices,” the notice said.

“Associated persons,” also known as intermediaries, who are compensated for the number of IRAs they bring to the company, have an incentive to encourage retirement plan participants to open IRA accounts with that intermediary.

More IRA accounts opened mean more money for the advisor.

FINRA said firms need to “supervise these activities to reasonably ensure that conflicts of interest do not impair the judgment” of brokers and advisors.

With defined contribution plans’ relative paucity of income options, which retirees need to last them through 20 or 30 years of post-employment life, there is little incentive to leave assets in a 401(k).

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Many workers instead are taking that money and moving it into an IRA, where there are more income options for investors and retirees.

Cerulli Associates published a recent report on the retirement dynamics of employer-sponsored retirement plans. Bing Walder, director at Cerulli, said in a statement that the lack of in-plan retirement income options means “assets accumulating in a defined contribution plan will eventually shift to an IRA.”

That is exactly what is happening.

IRAs aren’t getting rich through contributions of accountholders. The growth in assets held in IRAs is coming mostly from money rolled over from employer-sponsored retirement plans when employees leave or retire, according to data by the Investment Company Institute (ICI).

At the end of the third quarter last year, an estimated $6.2 trillion in U.S. retirement assets was held in IRAs, according to the ICI. That represents more than a quarter of all U.S. retirement assets, ICI data show.

FINRA Notice 13-45 also reminds a “broker-dealer and its associated persons” to meet the suitability standard when recommending an investment strategy to secure long-term retirement goals. Brokers need to meet their “fair dealing” responsibilities under FINRA Rule 2111, which may involve selling securities to meet retirement plan goals.

Firms that recommend investors to sell plan assets and roll over the cash proceeds into an IRA, or buy securities for a new IRA, are subject to Rule 2011, FINRA said.

Decisions involving IRAs typically entail a host of important discussions with a securities broker or a financial advisor.

Advisors need to talk to prospective and current IRA account holders about investment options, fees and expenses, various levels of service and advice, penalties for early withdrawals, legal protection from creditors, required minimum distributions and appreciation of employer stock.

FINRA has made the marketing of IRA rollovers an examination priority in 2014, and warns brokers that misleading marketing materials touting “no fee” IRAs, or that IRAs are the best or only option for an investor, are aviolations of Rule 2210.

Notice 13-45 highlights the care intermediaries must display in their marketing and sales materials.

“The marketing of the IRA rollover services offered by the broker-dealer must be balanced by a discussion of other available options and how they compare to the IRA offered, particularly with regard to fees,” FINRA said in its 13-45 Notice.

Questions for FINRA should be directed to Thomas M. Selman, executive vice president of regulatory policy, at (202) 728-6977, or to Angela C. Goelzer, vice president, at (202) 728-8120.

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is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at

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