A synopsis and analysis of FINRA Notice to Members 13-45 is contained below.

Employees leaving an employer must decide what to do with the former employees’ assets in company sponsored plans, whether they are a 401(k) or 457.

Former Employees have Four (4) Choices -

1)      Leave the money where it is, if permitted;

2)      Rollover assets into a new 401(k) or 457 plan, if permitted;

3)      Rollover the assets into an IRA;

4)      Cash out of the 401(k) or 457 plans.

In making a recommendation, according to FINRA, firms and registered representatives should consider the following:401K

A)    Investment Options; Generally speaking, investing in an IRA has more choices than the former employer’s plan but this may not matter if the former employee was happy with the prior plan’s choices. Likewise, the new plan’s investment choices may be less numerous but sufficient.

B)     Expenses and Fees; Fees usually fall into two types.  The first is plan or account fees.  Examples include administrative, account set up and custodial or annual fees for IRAs or fees to access customer service reps. The second type are plan administrative fees (such as compliance, record keeping or trustee fees) for plans.  The employer may pay for some or all of administrative fees for plans. Investment related fees are commissions, sales loads, mutual fund or ETF fees and/or investment advisory fees;

C)    Services; Plans may offer superior service without costs and broker-dealers may provide more or less service with respect to rollover IRAs;

D)    Penalty Fee Withdrawals; It is usually easier to borrow from an employer plan than an IRA.  If an employee leaves a job between 55 and 59 ½, then they may be eligible to take a penalty free distribution.  Generally speaking, there will be a penalty for IRA withdrawals if money is withdrawn unless the recipient is 59 1/2;

E)     Protection from Creditors and Legal Judgments; Usually, plan assets are immune from all creditors in bankruptcy or otherwise. IRA assets are immune from creditors in bankruptcy and may be immune from lawsuit related creditors depending upon state law.

F)     Required Minimum Distributions; IRA owners must begin to take required minimum distributions at age 70 and 1/2, but plan participants need not if they are still working; and

G)    Employer Stock. Rolling appreciated employer stock into an IRA means that it will be taxed as ordinary income at distribution.  If it is withdrawn from a plan, then it will likely receive long term capital gain tax treatment upon sale.

FINRA’s Focus Makes Sense Because IRA Asset Hold Real Money

As of the end of 2012, assets in IRAs were 5.4 trillion.  Total retirement assets at the same time were 19.5 trillion.  The reason that rollovers are in FINRA’s crosshairs is that 13 times as many assets were rolled into IRAs in 2011 than directly contributed that year.

Now that we realize the differences between IRAs and employer provided plans such as 401(k) s FINRA will examine firm’s activities under the following types of rules: (1) Suitability; (2) Conflicts of Interest; (3) Supervision; and (4) Communications with the Public.

Triggers of FINRA’s Suitability Rule – The recommendation to rollover funds into an IRA triggers the suitability rule (FINRA Rule 2111). Thus, firms and reps must examine the rollover decision by looking at age, investment objective, liquidity needs, investment experience, tax status, etc. After examining all of those circumstances, can it be said that the recommendation is reasonable?

Conflicts of Interest – If a registered rep or firm recommends a rollover into an IRA, they will likely get paid. Recommendation of keeping the money where it is or into a new employer plan likely means no payment. Thus, a clear conflict exists.

Supervisory Control Systems – FINRA Rule 3010 says that written supervisory procedures must be established.  Such procedures should make sure that marketing materials are fair and balanced and that reps are performing customer specific suitability analysis.  FINRA Rule 3012 requires that firms are testing the adequacy of their procedures. Such testing must focus on rollover IRAs.

Communications with The Public – FINRA Rule 2210 requires that communications with the public are fair and balanced and provide a basis to evaluate products or services. FINRA stated it is false to claim that the only choice or only sound one is to rollover the plan assets. Moreover, a rep or broker-dealer cannot claim that the IRA is free or carries “no fee” if, the investor will incur cost related to the account, investments therein or both.

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