Personal Finance

Advice about 401(k) rollovers is poised for a big change. Here’s why

Published

9 months ago

April 28, 2024

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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.

Fight over fiduciary standard: What 401(k) participants should know

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.

Retirement Planning: How to Maximize Your Financial Future

“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.

Personal Finance

Now is an ‘ideal time’ to reassess your retirement savings, expert says

Published

7 hours ago

January 22, 2025

Business Finance News

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When it comes to retirement savings, surveys often point to a big magic number you will need to have set aside to live well.

Yet retirement experts say to focus on another number — your personal savings rate — to make sure you achieve your retirement savings goals.

“Early in the year is an ideal time to reassess your retirement contributions and overall savings strategy because you can take advantage of any employer matches, adjust your monthly budget accordingly and stay ahead of potential market shifts,” said Douglas Boneparth, a certified financial planner and president and founder of Bone Fide Wealth, a wealth management firm based in New York City.

What’s more, increasing your retirement savings now gives your money more time to compound — earning interest on both your contributions and previously earned interest. That can “significantly impact your nest egg over the long term,” said Boneparth, who is also a member of the CNBC FA Council.

Boost your 401(k) deferral rate

If you have a 401(k) plan through your employer, now is a great time to look at your contribution rate, according to Mike Shamrell, vice president of thought leadership at Fidelity.

Most importantly, see how your savings rate corresponds to what your employer offers in terms of a company match, he said.

“It’s the closest thing a lot of people get to free money,” Shamrell said.

Oftentimes, companies have a match formula. If you’re not clear on how much you need to contribute to get the full match, contact your human resources department or 401(k) provider, Shamrell said.

Fidelity recommends saving at least 15% of your pre-tax income annually, including your contributions and money from your employer.

If you’re not quite there — or you want to save even more — even just a 1% increase in your deferral rate can make a big difference to your retirement savings over time, Shamrell said.

“It may not have the significant impact on your take-home pay that you that you may be envisioning,” Shamrell said.

Fund your IRA for 2025 — and 2024

Retirement savers also have a window of opportunity to fund individual retirement accounts for both this year and last year.

To count for 2024, contributions can be made up to April 15. (You must designate the deposit for tax year 2024.) For that year, individuals can contribute $7,000, or $8,000 if they are age 50 and over.

The same contribution limits apply for 2025, though savers have additional time — up to April 15, 2026 — to make those contributions.

Savers may be able to deduct those IRA contributions, depending on their income.

Revisit your investment allocations

In 2024, the average 401(k) balance grew about 11%, thanks to soaring stock markets, according to Shamrell.

Heading into the rest of 2025, now is a great time to revisit your personal asset allocations.

“Make sure your allocation didn’t drift too far into equities and that you don’t have more exposure to equities than you might realize,” Shamrell said.

If you’re worried about picking the wrong investment, you can instead opt for target date, asset allocation or balanced funds, which help decide how your funds are allotted for you, according to Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

Also be sure to consider to your risk capacity — the amount of risk you can afford — as well as risk tolerance — the amount of risk you’re willing to take, said Cheng, who is also a member of the CNBC FA Council.

Identifying those personal limits ahead of time can help you stay the course during market turbulence, she said. Investors who bail during the market’s worst days may miss the best days, which often closely follow, research finds.

If you’ve had any major recent life events — gotten married, bought a house or had a baby, for example — you may also want to check that your allocations still correspond to your long-term plans, Shamrell said.

Personal Finance

There’s a big inherited IRA change in 2025. How to avoid a penalty

Published

7 hours ago

January 22, 2025

Business Finance News

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Inheriting an individual retirement account is a windfall for many investors.

However, a lesser-known change for 2025 could trigger a costly surprise penalty, financial experts say.

Starting in 2025, certain heirs with inherited IRAs must take yearly required withdrawals while emptying accounts over 10 years, known as the “10-year rule.”

“The big change [for 2025] is the IRS is enforcing penalties for missed required distributions,” said certified financial planner Judson Meinhart, director of financial planning at Modera Wealth Management in Winston-Salem, North Carolina.

There’s a 25% penalty for missing a required minimum distribution, or RMD, from an inherited IRA. But it’s possible to reduce the fee if your RMD is “timely corrected” within two years, according to the IRS.

Here are the key things to know about the inherited IRA change.

Which heirs could face a penalty

Before the Secure Act of 2019, heirs could withdraw funds from inherited IRAs over their lifetime, which helped reduce yearly income taxes.

Since 2020, certain inherited accounts have been subject to the “10-year rule,” meaning heirs must deplete inherited IRAs by the 10th year after the original account owner’s death.

After years of waived penalties for missed RMDs from inherited IRAs, the IRS in July finalized guidance. Starting in 2025, certain beneficiaries must take yearly withdrawals during the 10-year window or they’ll face a penalty for missed RMDs.

The rule applies to heirs who are not a spouse, minor child, disabled, chronically ill or certain trusts — and the yearly withdrawals apply if the original IRA owner had reached their RMD age before death.

One group who could be impacted are adult children who inherited IRAs from their parents, according to CFP Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.

But the rules have become a “spiderweb mess of decision-making,” he said.

Avoid the ’10-year tax squeeze’

For 2025, there’s a enforced penalty for missed RMDs. But heirs also need to manage withdrawals to avoid the “10-year tax squeeze,” said Jastrem.

Over the past few years, some heirs have skipped yearly withdrawals from inherited IRAs, which could mean larger required withdrawals before the 10-year window closes, he said.

For example, boosting adjusted gross income can impact things like Medicare Part B and Part D premiums, eligibility for the premium tax credit for Marketplace health insurance and more.

Of course, timing inherited IRA withdrawals depends on your complete tax situation, including multi-year projections of your adjusted gross income, Meinhart said.

Personal Finance

‘Era of the billionaire.’ Here’s why wealth accumulation is accelerating

Published

9 hours ago

January 22, 2025

Business Finance News

President-elect Trump's cabinet to have more billionaires than any in history

The rich are getting richer.

The combined wealth of the world’s most wealthy rose to $15 trillion from $13 trillion in just 12 months, according to Oxfam’s latest annual inequality report — notching the second largest annual increase in billionaire wealth since the global charity began tracking this data.

Last year alone, roughly 204 new billionaires were minted, bringing the total number of billionaires to 2,769, up from 2,565 in 2023, the global charity found.

“Not only has the rate of billionaire wealth accumulation accelerated — by three times — but so too has their power,” Oxfam International’s Executive Director Amitabh Behar said in a statement Sunday.

“We’ve reached a new era now, we are in the era of the billionaire,” said Jenny Ricks, general secretary of the human rights group Fight Inequality Alliance. “The challenge now is turning this around and making this the era of the 99%.”

Despite the fact that America ranks first as the richest nation in the world in terms of gross domestic product, 36.8 million Americans live in poverty, accounting for 11.1% of the total population, according to the latest report from the U.S. Census Bureau.

“We need government serving people’s real needs and rights,” Ricks said, with increased funding for education and healthcare, among other social services.

‘Tax us, the super rich’

After Oxfam’s report was released, some of the world’s wealthiest people called on elected representatives of the world’s leading economies to introduce higher taxes on the very richest in society.

In an open letter to political leaders attending the annual World Economic Forum in Davos, Switzerland, more than 370 billionaires and millionaires said that they wanted to “tackle the corrosive impact of extreme wealth.”

To that end, “start with the simplest solution: tax us, the super rich,” the letter said.

36% of billionaire wealth is inherited

Oxfam found that 36% of billionaire wealth is now inherited. Much of that wealth will also get handed down. A separate report by UBS found that baby boomer billionaires’ heirs stand to inherit an estimated $6.3 trillion over the next 15 years.

“As the great wealth transition gains momentum … we expect the proportion of multigenerational billionaires to increase,” the report said.

According to Oxfam’s analysis, half of the world’s billionaires live in countries with no inheritance tax for direct descendants.

In the U.S., there is a federal estate tax up to 40%, depending on the amount of the estate over the current exclusion limit.

In 2025, the basic exclusion amount rose to $13.99 million per person, up from $13.61 million in 2024.

Meanwhile, President Donald Trump has vowed to fully extend the trillions in tax breaks he enacted via the Tax Cuts and Jobs Act in 2017, which also doubled the estate and gift tax exemption.

After 2025, the higher estate and gift tax exemption will sunset without action from Congress. If the provision expires, the exclusion will revert to 2017 levels, adjusted for inflation.

Some Democrats have pushed back on TCJA extensions, noting that they disproportionately benefit the wealthy, rather than middle-class families.

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