President Barack Obamas administration recently asked the Department of Labor to establish a fiduciary standard for financial professionals advising people on their options for rolling over their 401(k) funds into IRAs. There is a broad belief by those who do not understand how to convert retirement assets into retirement income that 401(k) rollovers can be detrimental to the investor. This is partially due to the negative press surrounding the regulation. While there are certainly issues that ought to be addressed, by indiscriminately targeting 401(k) rollovers, regulators may be eliminating opportunities for investors to purchase products which could greatly improve the emotional and financial well-being of the client in their retirement.
Properly advising a client on their retirement income involves much more than assessing the literal financial return on assets. Planning for a retirement is as much an emotional issue as a financial one. Generally speaking, there is typically no investor that places a higher value on security and predictability than one on the verge of retirement. Unfortunately, defined benefit plans which are the tools consumers historically relied on to provide peace of mind, have all but disappeared. Instead, they are left with defined contribution plans like 401(k)s that without strategic planning, provide no more assurance than the average mutual fund.
The good news for retirement investors is that there are insurance-based retirement income products which can be used to turn a defined contribution nest egg into a stable, pension-like stream of secure and predictable income. These investments contractually guarantee (subject to the claims paying ability of the insurance carrier) that a retiree will have income that cannot be destroyed or outlived. Products such as these include income annuities such as SPIAs (single premium income annuities) and DIAs (deferred income annuities) which can provide powerful, additional benefits.
These additional benefits include income guarantees on a single or joint-life basis, principle protection guarantees with installment and cash refund options, inflation protection with COLA (cost of living adjustment) riders and some liquidity features through commutation riders. On top of that, income annuities, unlike other traditional investments and guaranteed withdrawal benefits of deferred annuities, have no ongoing fee drag.
Since annuity investments require a product allocation rollover to the insurance product, these transactions would be subject to fiduciary standard scrutiny under the proposed regulation. This wouldnt be a problem if the formulas involved in assessing fiduciary standard compliance were capable of fully weighing the benefits received by the consumer from an annuity investment. Despite providing all of the guarantees that improve the emotional and financial well-being of the client, the narrow language of this new regulation could still infer a fiduciary standard violation from the sale of these tools.
Signs of appreciation
However, there are signs the federal government is beginning to appreciate the immense potential value insurance products have for the future of retirement income planning. A recent step forward was in passing a new regulation called the QLAC (Qualified Longevity Annuity Contract), which went into effect in July 2014. This new law allows a portion of a retirees pre-tax assets to be funneled into a QLAC, which is a form of a DIA. It allows a delay of required minimum distributions on that money up to age 85. While there are some restrictions on the age the investor must begin taking distributions and the size of the investment, there is no limit on how young a person may be when they reposition assets into a QLAC. This makes it an ideal vehicle to use for investors of any age to begin securing their future retirement income. Unfortunately, while the law did allow QLACs to be available inside 401(k) plans, few carriers actually provide them as an in-plan option. This means for many, to take advantage of a QLAC, it may require a rollover to an IRA.
The fact is, 401(k) rollovers to IRAs have been and, as it stands now, will continue to be an important step toward allowing brokers and advisers to craft the most suitable retirement income solutions for their clients while also mitigating the most potent financial risks to which retirees are vulnerable. If the government is going to update the laws to provide more protection for retirement investors, they should do so by continuing to pass legislation like the QLAC and by updating the fiduciary responsibility formulas. Applying indiscriminate scrutiny to 401(k) rollovers can potentially destroy a huge portion of insurance-based investment and protection opportunities that provide the emotional guarantees retirees need and want to enjoy a happy and healthy retirement.
Cloke is CEO of Thrive Income Distribution System, LLC., with 28 years of experience in retirement planning, including 16 years as a member of Million Dollar Round Table. Learn more at CurtisCloke.com.
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