CFP Board guide: avoid fiduciary errors in 401(k) rollovers

The CFP Board on Aug. 19 released the Guide to Applying the Fiduciary Duty to Rollovers, advising certified financial planners on steps to avoid fiduciary mistakes when advising clients on 401(k) rollovers. The guide stresses encouraging clients to obtain personalized financial advice rather than relying only on general education.

The board says CFPs offering general education must make clear they are not making recommendations. Education should be objective and not tailored to a client’s situation, and it should not express preferences or recommendations, even indirectly.

The guide cautions that a client instruction to move assets does not relieve an advisor of duties. If there is information that would lead a prudent professional to determine a rollover is not in the client’s best interest, advisors must inform the client. Advisors must also correct any incomplete or inaccurate assumptions that underlie a directed order.

Advisors are instructed to compare the client’s employer plan with alternatives by examining fees, investment options, services and other plan features before making a recommendation. The guide highlights common misconceptions, including that rollovers are always required or are easily reversible. Some rollovers may be irreversible or carry tax consequences.

Material conflicts of interest must be disclosed, and firms must prevent conflicts from compromising the duty to act in clients’ best interests. Potential conflicts include situations where rolling assets would generate compensation for the advisor or the firm under any compensation model. The guide flags revenue-sharing arrangements and account choices that could give higher revenue to the advisor while providing less benefit to the client.

The CFP Board recommends documenting the duty-of-care process used to reach a rollover recommendation, including the alternatives considered and the reasons one option is in the client’s interest. The guide includes a two-page checklist to help advisors apply the duty of care, and it recommends keeping records of comparisons and disclosures.

The guide notes that more than $1 trillion in assets are rolled over each year and that rollovers are increasing as Baby Boomers retire and younger workers change jobs. Brian Wong, assistant general counsel for standards at the CFP Board, attributed the rising volume to those demographic trends. The guide also notes regulatory and litigation risk; Creative Planning, an investment adviser with about $295.6 billion in regulatory assets under management, is defending a class action alleging fiduciaries steered plan assets into target-date funds with lower-than-normal equity exposure.

Andrew Fincher, a CFP at VLP Financial Advisors in Vienna, Virginia, wrote that the guide frames a rollover decision as a series of choices and offers a practical framework for comparing alternatives and documenting why a recommendation serves the client’s best interest.