Personal Finance
Advice about 401(k) rollovers is poised for a big change. Here’s why
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A new U.S. Labor Department rule will significantly change the advice many investors receive about rolling money over from 401(k) plans to individual retirement accounts, legal experts say.
The so-called “fiduciary” rule, issued April 23, aims to raise the legal bar for brokers, financial advisors, insurance agents and others who give retirement investment advice.
Such recommendations may be tainted by conflicts of interest under the current rules, the agency says.
Rollovers are undoubtedly a “chief focus” of the regulation, said Katrina Berishaj, an attorney at Stradley Ronon Stevens & Young.
“The Department of Labor was not shy about that,” said Berishaj, co-chair of the firm’s fiduciary governance group.
Millions of investors roll over funds each year
Rollovers are common, especially for retiring investors.
They often involve moving one’s nest egg from a 401(k)-type plan to an IRA.
In 2022, Americans rolled over about $779 billion from workplace retirement plans to IRAs, according to a Council of Economic Advisers analysis. Almost 5.7 million people rolled over money to an IRA in 2020, according to most recent IRS data.
The number and value of those transactions have increased significantly as more baby boomers enter their retirement years. In 2010, for example, about 4.3 million people rolled over a total of $300 billion to IRAs, according to the IRS.
A ‘major shift’ in rollover advice
The new Labor Department rule aims to make more investment recommendations “fiduciary” in nature.
A fiduciary is a legal designation. At a high level, it requires financial professionals to give advice that puts the client first. They have an obligation to be prudent, loyal and truthful when giving advice to clients, and to charge reasonable fees, experts said.
Today, many rollover recommendations aren’t beholden to a fiduciary standard under the Employee Retirement Income Security Act, attorneys said.
Labor officials fear that exposes investors to conflicts of interest, whereby advice may not be best for the investor but earns brokers a higher commission, for example.
If the past is any indication of the future, we can anticipate millions of rollovers each year.
Katrina Berishaj
attorney at Stradley Ronon Stevens & Young
Under the current legal rules, which date to the mid-1970s, a financial agent must satisfy five prongs to be considered a fiduciary.
One of those prongs says they’re a fiduciary if they provide advice on a regular basis, attorneys said.
However, many rollover recommendations don’t happen as part of an ongoing advice relationship. Instead, it’s often a one-time occurrence, attorneys said.
That means it’s “very unusual” for a rollover recommendation today to be beholden to a fiduciary standard, Reish said.
The new Labor Department rule changes that, however.
“Under this rule, one-time investment advice to roll assets out of a plan would trigger fiduciary status under ERISA,” said Berishaj, who called the change a “major shift.”
Why rollover advice may be ‘higher-quality’
Under the new rule, advisors would generally be expected to consider factors such as alternatives to a rollover, including the pros and cons of keeping money in a 401(k) plan, Berishaj said.
For example, they’d likely compare various fees and expenses of a workplace plan vs. an IRA, as well as the services and investments available in both. They’d also provide certain disclosures to investors prior to the rollover, such as a description of the basis for that rollover recommendation, she added.
Good advisors are likely making an honest effort to do what’s best for their clients, but hopefully the Labor Department rule would “bring up the bottom to a better quality,” Reish said.
“I think the DOL’s intent is to encourage higher-quality advice, which would get people both better invested and with lower cost,” Reish said.
However, many financial companies dispute the necessity of the Labor Department rule.
For example, the regulation will “harm retirement savers and their access to the professional financial guidance they want and need,” said Susan Neely, president and CEO of the American Council of Life Insurers, an insurance industry trade group.
Additionally, the Labor Department “has chosen to ignore the significant progress made to strengthen consumer protections” over the last several years, Neely said. They include rules issued by the Securities and Exchange Commission and National Association of Insurance Commissioners.
Reish said those rules are “all less demanding than the DOL rule,” Reish said. “So, it’s a higher standard across the board.”
That’s especially true of recommendations from insurance agents to roll money from a 401(k) plan to an annuity held in an IRA, due to differences in current legal rules versus the Labor Department requirements, according to attorneys and other financial experts.
“We believe insurance agents will be most exposed to this rule, especially those who sell annuities,” Jaret Seiberg, financial services analyst for TD Cowen Washington Research Group, wrote in a recent research note.
Industry groups will likely sue to block the rule from taking effect, he said.
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Millions of older workers lost their jobs during the Covid-19 recession.
Between March and April 2020, 5.7 million workers ages 55 and up lost their jobs, according to the Economic Policy Institute’s analysis of federal data.
Now, five years since the onset of the pandemic, some older workers may be benefitting from policies that help them extend their careers.
“We’re seeing more and more employers putting in benefits and programs that help retain some of that older workforce,” said Carly Roszkowski, vice president of financial resilience programming at AARP.
These programs include phased retirement plans, part-time schedules and remote or hybrid work options, Roszkowski said.
Money is still the main reason why people want to stay in the workforce longer, particularly as inflation has pushed prices higher, according to Roszkowski. But there are also other motivators, including social connections, a sense of purpose or meaningful work that may help inspire individuals to continue to work.
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Working remotely may help extend careers
One lasting impact of the pandemic — increased flexibility to work remotely — may be helping some older workers delay retirement, according to new research from the Center for Retirement Research at Boston College.
The research finds that an individual who is working remotely is 1.4 percentage points less likely to retire than a worker in an otherwise comparable situation.
Based on those results, that could enable workers to extend their careers by almost a full year.
“If they delay claiming Social Security for that year, or delay digging into their 401(k) for that year, or contribute to their 401(k) for that year, that’s all going to be good for their finances,” said Geoffrey Sanzenbacher, a research fellow at the Center for Retirement Research and professor of the practice of economics at Boston College.
Whether or not individuals can work remotely comes down to employer preference. For example, some companies — JPMorgan, AT&T, Amazon and Dell — have moved to five-day in-office policies. The federal government, which has a workforce that skews older, has also moved to enforce in-person work policies under President Donald Trump.
Research suggests older workers benefit from remote work. In particular, the employment rate of older workers who have a disability increased by 10% following the pandemic, according to the Center for Retirement Research.
To be sure, not all careers may allow for remote work.
What career experts say to do now
Career experts say there are certain ways older workers can help extend the longevity of their working years.
Older workers should focus on upscaling — gaining new skills or boosting their current skill set — to help show off their skills to employers, said Vicki Salemi, career expert at Monster. That may be through a certification, online class or volunteering, she said.
Having a foundational, basic understanding of technology tools used in the workplace is also essential, said Kyle M.K., a talent strategy advisor at Indeed.com.
Older workers may also want to show off their relationship building skills, which can set them apart from younger generations that are more digitally inclined, according to Salemi.
Mentoring, conflict resolution or other interpersonal skills are highly sought after skills that should be highlighted, where possible, M.K. said.
By keeping digital profiles up to date on job search sites, older workers can emphasize their skills and experience, he said.
“Digital presence is sometimes the very first introduction that the employer will have with you,” M.K. said.
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If you’re eager to increase your retirement savings, a lesser-known 401(k) feature could significantly boost your nest egg, financial advisors say.
For 2025, you can defer up to $23,500 into your 401(k), plus an extra $7,500 in “catch-up contributions” if you’re age 50 and older. That catch-up contribution jumps to $11,250 for investors age 60 to 63.
Some plans offer after-tax 401(k) contributions on top of those caps. For 2025, the max 401(k) limit is $70,000, which includes employee deferrals, after-tax contributions, company matches, profit sharing and other deposits.
If you can afford to do this, “it’s an amazing outcome,” said certified financial planner Dan Galli, owner of Daniel J. Galli & Associates in Norwell, Massachusetts.
“Sometimes, people don’t believe it’s real,” he said, because you can automatically contribute and then convert the funds to “turn it into tax-free income.”
However, many plans still don’t offer the feature. In 2023, only 22% of employer plans offered after-tax 401(k) contributions, according to the latest data from Vanguard’s How America Saves report. It’s most common in larger plans.
Even when it’s available, employee participation remains low. Only 9% of investors with access leveraged the feature in 2023, the same Vanguard report found. That’s down slightly from 10% in 2022.
How to start tax-free growth
After-tax and Roth contributions both begin with after-tax 401(k) deposits. But there’s a key difference: The taxes on future growth.
Roth money grows tax-free, which means future withdrawals aren’t subject to taxes. To compare, after-tax deposits grow tax-deferred, meaning your returns incur regular income taxes when withdrawn.
That’s why it’s important to convert after-tax funds to Roth periodically, experts say.
“The longer you leave those after-tax dollars in there, the more tax liability there will be,” Galli said. But the conversion process is “unique to each plan.”
Often, you’ll need to request the transfer, which could be limited to monthly or quarterly transactions, whereas the best plans convert to Roth automatically, he said.
Focus on regular 401(k) deferrals first
Before making after-tax 401(k) contributions, you should focus on maxing out regular pre-tax or Roth 401(k) deferrals to capture your employer match, said CFP Ashton Lawrence at Mariner Wealth Advisors in Greenville, South Carolina.
After that, cash flow permitting, you could “start filling up the after-tax bucket,” depending on your goals, he said. “In my opinion, every dollar needs to find a home.”
In 2023, only 14% of employees maxed out their 401(k) plan, according to the Vanguard report. For plans offering catch-up contributions, only 15% of employees participated.
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