Consolidation may help clients clear path to retirement readiness
By Mark E. Caner, MBA, AEP, ChF C, CLU, CFPMr. Caner is President of W&S Financial Group Distributors, Inc. He can be reached at firstname.lastname@example.org
For generations past, a gold watch, presented at retirement, would mark the end of a long career with a single employer. For today’s generations, a stop watch, presented at hire, would seem more appropriate. The mindset for many workers, particularly Millennials (born 1981 to 1995), has shifted from “how long have I been at my current job?” to “‘how long until I move to my next job?”
Behind the shift is a combination of economic and societal forces. Expectations of lifetime employment have been abandoned by some employers and employees. Employers are quick to adjust the size of their workforce due to fluctuations in business volume. Employees meanwhile pursue moves based on career ambitions, family situations and lifestyle considerations. America is a nation in motion.
Lost in the Shuffle
As job changes occur, workers routinely change their schedule, their commute, their labor specialty, often even their industry. But one important item they often overlook is their retirement plan. As a result, they may collect them in quantities.
Advisors should examine their book of business. As clients accumulate past employers, many accumulate past retirement plans as well. In an age when individuals profess a desire to simplify their lives, a proliferation of qualified plans may do just the opposite.
Too Much to Manage
No one sets out to be a retirement plan packrat. Clients are busy with pressing day-to-day work and family matters. They may feel unprepared to make decisions and maintain the status quo by default. Retirement may seem so far away that planning matters go neglected.
Of course failing to make a decision ultimately is a decision in itself. When clients allow retirement plans such as 401(k)s, 403(b)s and IRAs to accumulate absent an overall strategy, a host of consequences may arise. Piling up retirement plans, packrats may box themselves into a mess of their own making. Help your clients consider these risks and their possible consequences: Losing track of plans. Americans tend to be mobile. Have plan statements and communications kept coming through multiple changes of address? Are clients current on the management, objectives and performance of their investment options? For that matter, do they still know where to reach all their former employers and plan providers? Maintaining control over a retirement plan depends first on knowing its makeup and options.
Duplication is contrary to diversification. Someone who holds a number of retirement plans may think they are diversified. They began those plans at different times. And the plans likely offered different funds from different managers. But the underlying investments may be largely the same. Just capturing an accurate picture of overall allocation is harder when assets are scattered among multiple plans. The jumble makes it tough to measure whether investments align with retirement goals. And when portfolio rebalancing is needed, that task also is made tougher when it must be managed over multiple plans.
Making Extra Work
More retirement plans mean more accounts to track and more paperwork to file. There may come a time when a client isn’t even certain they’re still receiving information on them all, much less know the current provisions governing the various retirement plans. Changes in expenses, rates of return and asset allocations may go unnoticed for years. And even if the bookkeeping isn’t too big a hassle now, what about the future? When age 70½ arrives, withdrawals must begin from all those qualified plans. That may be a lot of moving parts, and a lot of tax paperwork.
The more funds are consolidated into a single plan, the more readily they can be moved between that plan’s investment options. If a client favors the investment options in a particular plan, but only a small share of their qualified assets are in that plan, they’re limited in the moves they can make.
Owning Outdated Things
Consumers replace their electronics, appliances and automobiles as advances occur. Plan features and benefits likewise change over time. Options provided in newer alternatives may not be available in older ones. Or participants who are no longer with an employer may potentially have less access to that plan’s administrative and educational resources.
A client who leaves qualified assets in a previous employer’s plan may be locked in time. Future contributions to the plan are prohibited. Withdrawals from the plan and exchanges between its investment options may be limited. Investment options are of course limited solely to those offered by the plan. And charges and fees for a rollover IRA may be lower.
Making life more difficult for heirs
When a plan packrat passes away, who gets stuck cleaning up the mess? The heirs, or course, and the job may be massive. A client who holds onto multiple retirement accounts for several decades may end up sending beneficiaries on a complex, time-consuming scavenger hunt.
First, Know the Law
Before doing anything, understand the activities of financial professionals recommending IRA rollovers to 401(k) participants are subject to U.S. Department of Labor supervision. If a rep or firm is a fiduciary to the plan from which a rollover will take place, making a recommendation on a distribution or rollover, advising on how to invest rollover funds in an IRA or even answering questions about these matters may subject the rep and firm to ERISA fiduciary responsibility and prohibited transaction rules. Consult the firm’s compliance or legal professionals for information and guidance.
Make a Plan to Clear a Path
Securing a comfortable retirement is a huge challenge in its own right. Advisors shouldn’t let clients fall in to packrat traps that make it even harder. Advisors should instead help clients understand what they have and consider what the want. Consolidation may offer a better way to manage financial affairs and pursue retirement goals. It’s all part of the consultative relationship-building process that sets apart a true financial professional.