FINRA issued a notice this week reminding firms of their responsibilities when it comes to recommending a rollover or transfer of assets from an employer-sponsored retirement plan to an IRA or marketing IRAs and associated services.
The organization, which is the largest independent securities regulator in the U.S., warned that it will make reviewing firm practices in this area a top priority in 2014.
It pointed out that a recommendation to a client to roll over plan assets into an IRA rather than keeping assets in a previous employer's plan should be based on an investor's individual needs and circumstances. It should take into account investment options, fees and expenses, services, penalty-free withdrawals, required minimum distributions and employer stock.
FINRA said that if employees leave a job between the ages of 55 and 59 ½, they may be able to take penalty-free withdrawals from a plan. In contrast, penalty-free withdrawals generally may not be made from an IRA until age 59 ½. It also may be easier to borrow from a plan.
Once individuals reach age 70½, the rules for defined contribution plans and IRAs change, with both requiring the periodic withdrawal of certain minimum amounts of money, known as the required minimum distribution.
If a person is still working at that age, he is not required to make required minimum distributions from his current employer's plan, which could be advantageous to those who plan to work longer, FINRA said.
Firms also must take into account conflicts of interest and suitability and fair dealing when helping clients roll over assets. If an advisor or broker-dealer stands to gain monetarily from the advice they are giving, there is a conflict of interest, FINRA's notice stated. Conflicts also may exist for firms that are responsible for educating plan participants about their choices, but they have an incentive to encourage participants to open IRAs rather than maintain their assets in their plan.
Broker-dealers should review their retirement services activities to assess conflicts of interest.
Broker-dealers also must meet suitability standards and deal fairly with clients. FINRA's suitability rule requires that a broker-dealer and its associated persons have a reasonable basis to believe that a recommended transaction or investment strategy involving a security is suitable for the customer. They must take into account the investor's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs and risk tolerance.
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