Rollovers in the Spotlight

Rollovers from defined contribution (DC) plans into individual retirement accounts (IRAs) occur after money in the plan becomes available for distribution following a worker’s job change or retirement. Plan participants maintain the tax-deferred status of their balances while moving them to IRAs, while gaining access to a wide range of investment options. These rollovers represent a top source of money in motion in the U.S. retirement system, with nearly $600 billion rolled into traditional IRAs in 2020, according to the latest data from the IRS .[i]

The DOL Rule. The Department of Labor’s Retirement Security Rule has thrust IRA rollovers into the spotlight once again. Among other requirements, the new Rule would categorize financial professionals (FPs) as advice fiduciaries when they recommend that their clients roll over assets into an IRA. A fiduciary standard of care would obligate FPs to avoid conflicts of interest and put the interests of their clients above their own.

Many FPs, such as investment advisor representatives (IARs), already follow this standard when interacting with clients. But adherence to the Rule in the context of IRA rollovers could force many other FPs, especially those who mainly rely on commissions, to modify their compensation systems, if not their entire business models. Those changes could include reducing their handling of rollovers by clients with lower levels of investable assets, because from the FP’s perspective the costs involved with following a fiduciary standard of care may exceed the benefits for these clients. And since most IRA rollovers are FP-mediated, a substantial change in their involvement could change the dynamics of the rollover market in profound ways.

Rollovers are common. According to recent LIMRA research, among investors aged 40 to 85 with at least $100,000 in household investable assets, 14 percent reported either cashing out, rolling out, or transferring a DC plan balance in the previous two years.[ii] Of these, half (7 percent of all investors) reported rolling a DC plan balance into an IRA within the previous two years.

FPs matter. The involvement of FPs appears to make a difference in investors’ plan distribution decisions. While the incidence of money being removed from DC plans in the form of rollovers, cash-outs, and transfers did not vary significantly based on FP usage, the specific action chosen by the investor did. Among investors working with FPs on a regular basis who decided to roll to an IRA, nearly 9 in 10 (88 percent) consulted this FP or another before making their rollover decisions. Among investors who do not work with FPs, only 1 in 4 consulted any financial professionals to help with their rollover decisions. In addition, those who do not regularly work with FPs are more likely than those who do work with FPs to have cashed out the balance, 34 percent vs. 24 percent, respectively, and less likely to have rolled to IRA, 42 percent versus 56 percent, respectively.

Wealth effects. Wealth undoubtedly plays a role in rollover decision-making. For example, investors with $100,000 to $499,999 in household investable assets are much more likely than investors with household wealth of $500,000 or more to cash out their balances, 34 percent versus 20 percent, respectively. Yet even when controlling for wealth, among those investors who gained access to their DC plan balances in the past two years, IRA rollovers are more common among those working with FPs (Figure 1). This is especially true for investors with $100,000 to $499,999 in assets, who tend to be less financially knowledgeable. The incidence of taking any distribution — cash-outs, rollovers, or transfers — over the past two years is roughly the same when controlling for wealth, though investors whose households do not work with FPs are slightly more likely to have taken a full-balance distribution, possibly reflecting a greater tendency for wealthier investors to keep the money in the DC plan and not take out the entire balance at once.

Figure 1 — Investors’ Recent DC Plan Distribution Activities

*Based on 4,500 investors (aged 40 to 85 with at least $100,000 in household investable assets).

**Based on 687 investors who had taken a full-balance distribution from a DC plan within past two years. “FP” = financial professional. Investable assets do not include the value of the primary residence. Source: Analysis of 2023 Retirement Investors Survey, LIMRA, 2024.

Conclusions. As a broad generalization, and from the federal government’s perspective, it is preferable for investors to use tax-advantaged retirement savings for their intended purpose: to support themselves in retirement. That means building and preserving their savings during their working years. Yet when money in DC plans becomes available for distribution, all too many Americans, by choice or necessity, cash out the balance before age 60, thereby exposing it to taxation and penalties; many will do so to meet near-term spending needs. Rolling to an IRA would serve to protect these assets, because doing so can avoid the taxes and penalties associated with cashing them out. Rolling balances to a new DC plan would also preserve assets, maintain ERISA protections[iii], and seems to be the government’s preference. However, this choice is not available to all investors, including workers moving on to employers not offering DC plans and retiring investors. And simply leaving the money in the DC plan (when allowed) may not be ideal, either. Along with indefinitely linking their finances to a past employer, keeping the money in the plan limits the investor to funds the plan offers, which may not meet the investor’s needs and could be more expensive than similar funds offered outside of the plan. Moreover, by rolling to an IRA, investors gain access to a much larger array of income-generation choices, including annuities.

In other instances, investors might decide to roll out the money to an IRA, but receive little guidance on the specifics, including the best destination provider and investment(s). Either way, the direct involvement of financial professionals can lead to fewer cash-outs and more optimal rollover choices, ultimately preserving clients’ savings until retirement.

The DOL’s Retirement Security Rule intends to compel more FPs to act in the best interest of their clients in the context of IRA rollovers. Compliance with the new rule could discourage some FPs from dealing directly with rollovers, leading to a reduction in middle- or mass-affluent-market clients in favor of wealthier clients. If so, providing sound guidance to millions of Americans without a trusted FP could become a major challenge for both public- and private-sector stakeholders.

[i] The IRS includes a small number of IRA-to-IRA transfers in their IRA rollover estimates.

[ii] Source: Analysis of 2023 Retirement Investors Survey, LIMRA, 2024. For full methodology, see Retirement Investors: Behaviors, Attitudes, and Financial Situations , LIMRA, 2024 (LIMRA log-in required).

[iii] Rollovers are permitted from some non-ERISA plans, such as certain 403(b) plans offered to public school employees.