Why upcoming IRS rollover guidance is likely to disappoint advisors

• Key insight: As the IRS prepares to finalize IRA rollover guidelines, those guidelines are unlikely to satisfy all the concerns advisors have with the process.
• What's at stake: Clients pursuing rollovers, and advisors helping them, often face tedious and lengthy processes that could discourage them from beneficial rollovers.

New IRS guidelines may ease some of the tedium associated with rolling employer retirement plans to individual retirement accounts, but advisors may be disappointed that the changes don't go far enough.

Processing Content

Rolling over assets from an employer retirement plan, such as a 401(k), can reduce fees and consolidate retirement plans into one place, among various benefits. But complex processes can serve as impediments to completing rollovers.

The IRS and U.S. Treasury Department issued rollover guidance in August and sought public comments through Oct. 23. The guidance was a notice including sample forms and proposed procedures and protocols for standardizing the rollover process that are optional for sponsors of plans.

Some advisors aren't fully satisfied with the guidelines because they think the rollover process could be fully digitized — eliminating paper checks in favor of electronic funds transfers, according to comment letters. They'll have to wait to see if the IRS and Treasury take any of the concerns into account when finalizing the guidelines.

A New York City-based advisor named George Poole said in his comment that he worked on a rollover with a custodian requiring wet signatures and mailing paperwork back and forth between the recipient custodian and distributing custodian.

"The paperwork also required that the recipient sign that it was accepting the account so the hard copy paper had to be mailed to the recipient custodian who then had to sign the same form and then mail those same documents back to the distributing custodian before any transaction would occur," Poole wrote.

He recommended the procedures include information about authentication requirements for all parties, and he recommended the parties always keep the client in the loop during the process.

Another advisor, Iurii Nosenko in Weston, Florida, in another comment letter, recommended completely removing paper checks from the rollover process and phasing in requirements by plan size, including a firm end date for using paper checks. After the transition, direct rollovers should be done using electronic funds transfer: ACH or wire.

The distribution decision is another in the guidelines, according to Denise Appleby, CEO of Appleby Retirement Consulting Inc. in Grayson, Georgia, who wrote in a comment letter that custodians or recordkeepers might not know whether a participant has had a distributable event or other information such as how much is vested, so employers' plan administrators should certify distributable events and other details.

Even custodians criticized the reliance on paper checks. Fidelity Investments described them as creating inefficiencies.

"The retirement industry's reliance on disparate rollover data requirements, manual documentation, and paper checks introduces avoidable inefficiencies, longer processing times, operational risk, and opportunities for participant confusion," General Counsel Roberto Braceras wrote in a comment letter.

Fidelity urged Treasury not to prescribe specific technologies for authentication or tools for fraud prevention, as both risks and technologies tend to "evolve rapidly," so there should be flexibility for financial institutions to adapt as threats emerge.

Another custodian, Betterment, recommended standardizing digital transfers and prohibiting procedures it described as "burdensome," such as distribution letters and medallion signature guarantees, which are special stamps used when transferring or selling securities.

"A paper communication system creates delays, errors, and opportunities for providers to impose burdensome procedures, all of which serve to discourage participants from completing rollovers," Joshua Rubin, vice president of legal, and Caroline Wallace, legal counsel, wrote in a comment letter.