A rollover, including an individual retirement account (IRA) rollover, is a mechanism by which participants in qualified retirement plans (e.g., 401(k) plans) may defer taxation of plan distributions by moving the distributed amounts into IRAs or other eligible retirement plans. Clearly, the decision in the first instance to receive a distribution of retirement savings from an employer’s qualified retirement plan, and the additional decision of whether and where to roll those savings, are important financial decisions affecting an investor’s financial security in retirement. And financial industry service providers are frequently consulted in making those decisions.
A U.S. Government Accountability Office (GAO) report published in March 2013 noted that the financial industry generally encourages employees to roll over their assets into IRAs without fully explaining the options that are available to these investors or making a valid determination that a rollover into an IRA is in the investor’s best interest. It is also noteworthy that financial industry service providers may have economic incentives for recommending that retirement savings be moved into an IRA or other financial product offered by a particular financial services firm.
It is with this background in mind that the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) announced their regulatory and examination priorities, and both regulatory authorities included IRA rollovers among their examination priorities for 2014. The FINRA and SEC announcements, published January 2 and January 9 respectively, reflect a perception on the part of these regulatory authorities that financial industry practices surrounding IRA rollovers are areas of heightened or significant risk that could adversely affect investors.
FINRA specifically indicated that reviewing firm rollover practices will be an examination priority, and firms’ marketing materials and supervision in this area will be examined. FINRA will also evaluate securities recommendations made in rollover scenarios to determine whether they comply with FINRA’s applicable suitability standards. FINRA is urging financial firms to review FINRA Regulatory Notice 13-45, which was published in late 2013 to remind financial firms of their responsibilities when recommending a rollover or transfer of retirement plan balances to IRAs and when marketing IRAs and associated services.
The SEC indicated, among other things, it will examine the sales practices of investment advisers targeting retirement-age workers to roll over their employer-sponsored 401(k) plan into higher cost investments, including whether advisers are misrepresenting their credentials or the benefits and features of IRA plans or other alternatives. The SEC also will examine broker-dealers and investment advisers for possible improper or misleading marketing and advertising, conflicts, suitability, churning, and other activities. when recommending the movement of assets from a retirement plan to an IRA rollover account.
There is a clear message to the financial industry that the regulatory scrutiny of IRA rollover practices and related marketing materials is going to be dialed up.