Brokers who give retiring workers bad advice about what to do with their 401(k) plans should expect some headaches: U.S. securities regulators are taking a closer look at what happens when investors roll their workplace balances into private individual retirement accounts.
The Financial Industry Regulatory Authority and the U.S. Securities and Exchange Commission are reviewing firms' practices for advising customers about so-called rollovers. The SEC said on Thursday that the issue is one of its 2014 examination priorities, after FINRA announced its own plans on January 2.
Brokers should recommend a rollover only after thinking about several factors for the investor, such as low-cost funds available through some 401(k) plans and differences in fees between the two types of accounts, FINRA said.
Violations can lead to fines, suspensions or being thrown out of the industry.
FINRA's announcement marked the second time in less than a week that the regulator sounded an alarm bell about retirement plan rollovers. It also published guidance to the industry on December 30.
The regulators' concerns come as retirement plan rollover practices are being subjected to greater public scrutiny. Americans have roughly $21.7 trillion in retirement accounts, according to the Investment Company Institute. That covers all types of retirement accounts, including $5.6 trillion in employer-sponsored retirement plans, assets that could be lucrative for brokers who convince clients to invest them in securities through an IRA.
A report last year by the U.S. Government Accountability Office concluded that the financial industry generally encourages employees to roll over their 401(k) assets into IRAs without determining whether the move is in an investor's best interest.
Brokers are not the only ones facing scrutiny on these issues. Most major financial companies manage 401(k) plans for employers and often offer advice to employees about the particulars of their plans.
The U.S. Department of Labor is also developing a rule that would establish more stringent ethical responsibilities for advisers who counsel workers on rollovers.
"This area is an area where disclosure, the quality of advertising and supervision of the investments that are made, is absolutely critical," Richard Ketchum, FINRA's chairman and chief executive, said in an interview. "We've seen evidence in which they're not always handled well," he said.