After years of debate, lobbying and haggling, the Department of Labor’s fiduciary rule is finally in effect, sort of. I receive at least half a dozen emails a week offering to help me comply. I might accept such invites if I were at all concerned about being able to comply.
Most of these services are emphasizing the wrong things—the same things the media seems to focus on—cost comparisons. The software offerings on costs are proliferating faster than a virus.
Cost comparisons are important but from what I see, many think that’s the crux of the whole process. Experienced financial planners know better.
The typical administrative fees and investment vehicle costs get all the attention but other fees and costs can have a big impact on specific clients.
One of the biggest costs in both size and inconvenience that is not present with IRAs is the mandatory 20 percent withholding on distributions from a qualified plan. For many clients wishing to draw upon their assets, particularly those who have yet to begin receiving Social Security benefits, 20 percent is too much.
In addition, some plans charge a small fee to make a distribution of any kind. For those wanting to draw monthly, that can add up. Some plans don’t allow distributions on a frequent basis such as monthly anyway.
These fees and the withholding often come as an unpleasant surprise especially to those excited to use the exemption from the 10 percent early distribution penalty for those who separate from service at age 55 or more. This exemption is still often an important factor for persons between 55 and 59 ½ but is only available to qualified plan participants.
Other exemptions from the 10 percent penalty are only allowed on distributions from IRAs such as for payments of health insurance premiums paid while unemployed and distributions to qualified first-time homebuyers, up to $10,000.
In practice, the 55+ exemption for qualified plans is the most utilized. Because the time frame is no more than a few years, we have sometimes recommended clients leave funds in sub-par qualified plans just for this provision. At age 59 ½, the funds rollover into an IRA or another qualified plan depending on the circumstances. Circumstances can be more influential than cost considerations.
For clients that are likely to consider annuitizing part of their nest egg, an understanding of the options in the existing plan is important. In many cases, the payments relative to the lump sum in qualified plans is better than what would be available for purchase on the open market with IRA dollars.