It is common practice for financial services firms to contact 401(k) participants who are nearing retirement to discuss rolling over their 401(k) nest egg into an individual retirement account (IRA).

Several different regulatory agencies, including the Financial Industry Regulatory Authority (FINRA), the Government Accountability Office (GAO), the Department of Labor (DOL), and the Securities and Exchange Commission (SEC), are focusing attention on this practice.

FINRA Notice 13-45

FINRA is making it a priority to examine these practices. Notice 13-45 reminds broker-dealer firms of their obligations when making recommendations about rolling over retirement plan assets and marketing IRAs and associated services. The Notice focuses on the recommendations firms make to participants in 401(k) and other employer-sponsored retirement plans who are terminating employment and contemplating how to invest their plan assets.

Broker-dealers may no longer just urge participants to make an IRA rollover, even if the securities in the IRA would be suitable. Broker-dealer recommendations must be based on an evaluation of the pros and cons of the following four options:

  • Keeping the assets in the old employer’s plan,
  • Rolling the assets into the new current employer’s plan,
  • Rolling the assets into an IRA product that the firm is authorized to sell, or
  • Taking a taxable distribution.

Suitability Standards

When a firm recommends that an individual sell his or her 401(k) assets and roll the cash into an IRA, the recommendation to sell plan-held securities is subject to FINRA Rule 2111. The rule establishes a suitability standard that requires a broker-dealer and its associated personnel to have a reasonable basis for determining whether a recommended securities transaction or investment strategy is suitable for the individual. Rollover suitability obligations extend not only to the pros and cons of the plan maintaining the distribution-eligible account, but they also apply to the new current employer’s plan (if any) when a participant changes jobs.

In Notice 13-45, FINRA recommends that certain suitability factors be considered when a firm recommends rolling assets into an IRA rather than keeping the assets in a prior employer’s plan or rolling them into a new employer’s plan.

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