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New Law Extends ERISA Protections to IRAs - What You Should Know Before Rolling Your 401(k) to an IRA

Understanding ERISA Protections for IRAs: A Guide Before Rolling Over Your 401(k)

The Department of Labor released regulations earlier this week to provide consumers with new protections for investors moving assets from their 401(k)s to individual retirement accounts (IRAs). This shift, which approaches $1 trillion each year, has grown due to the influx of Baby Boomer retirements. Previously, ERISA laws safeguarded financial advice within 401(k) plans but not after funds moved into IRAs.

What the law does

Starting in September, the new regulation extends ERISA’s fiduciary requirements to all advisers, brokers, and insurance agents advising on IRAs, including rollovers. Proponents argue this protects consumers who may lack a full understanding of the conflicts of interest some advisors operate under. For instance, insurance agents may earn significant commissions selling annuities.

According to a Wall Street Journal article the regulation is designed to make fees more transparent. “The Labor Department is concerned that when a person is moving what might be their entire 401(k) account into an IRA they should be receiving advice that’s in their best interest,” said Fred Reish, an attorney who specializes in employee benefits. 

The current standard for insurance agents is weaker than what the Securities and Exchange Commission imposes on brokers and investment advisers when handling sales of mutual funds and other securities in rollovers. Insurance agents are regulated under state insurance laws. 

What the law means for you

This regulation culminates a decade-long debate and follows previous administrations' unsuccessful attempts to widen ERISA’s fiduciary standard. Legal challenges, most likely from the insurance lobby, are anticipated. The annuity lobbying group Insured Retirement Institute is already complaining about record-keeping and disclosure requirements of the new law. 

Despite industry objections, the Labor Department underscores extensive consideration of public comments in its decision-making process.

The regulation will notably impact advisors selling insurance products like indexed annuities. Under the new rule, brokers and insurance agents must adhere to fiduciary standards and disclose their responsibilities in writing, even if state laws already require acting in customers’ best interests.

Ark Royal Wealth Supports Consumer Protections and Transparency

We think this is a change that’s long overdue. We’ve seen examples of some advisors who claim to work as fiduciaries, but whose main compensation comes from selling commissioned annuity products. Consumers should remember one simple fact: if an advisor is paid by commission they have a conflict of interest – and aren’t working in your best interest.