Episode 2 | JORDAN DUNSMORE | What You Need to Know About Rollovers

Episode 2 of Beyond Your Money is LIVE! 🎙️

In this episode, Jordan Dunsmore joins host Mike Dukovich to break down rollovers, what they mean for your financial future, and key things you need to know.

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Disclosures

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invest into directly.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

Transcript

SPEAKER_01 0:00

And welcome to another edition of the Beyond Your Money Podcast. I'm your host, Mike Dukovich. Today I've invited Jordan Duncmer, partner and senior wealth manager here at YTS to join in a conversation about something that's very prevalent in our business, and that's rollovers. Jordan, thanks for coming aboard. Mike, thanks for having me. Absolutely. So this is something that we deal with every day in our industry, every day in our business. I get asked about this on the street when we're when we're walking in the neighborhood. And that's really the topic of rollovers. It's something that's just integral into our business, integral in financial planning uh in general. And so I wanted to kind of have a conversation about that with you and talk uh to our listeners about what they can expect, what that means, what the rules are, what the obligations are, and uh and kind of see where that goes. So thanks for being a part of it. Of course, yeah.

SPEAKER_00 0:59

Thanks for having me.

SPEAKER_01 1:00

Of course. So, Jordan, why don't you start by telling us uh when rollovers happen? What are the main reasons why people bring up the word rollovers?

SPEAKER_00 1:07

Yeah. So the main reasons they happen um with your current employer is you've left, you've been fired, you've retired. It's it's generally those three reasons, and you're no longer with the company. Um, so the the funds are are there. And generally 401k is one of the top two largest assets that our client has be have between uh their home and again their their employer plan.

SPEAKER_01 1:28

Yeah, so really separation from service. That's a that's the key phrase. When when you're no longer with your employer, you have a qualified plan that you've been adding to that theoretically maybe they've been adding to as well on your behalf. When you are no longer there, you have an opportunity to think about a rollover. Um, so when a client comes to us and says, I've had this event, should I roll over my my money? That kind of starts the conversation. And and um, what are some of the things that you have to think about as an advisor uh before you say, yeah, rollover might be the right way of going for a client?

SPEAKER_00 1:59

Yep. So there's there's a number of different factors that that we'll bring into play. Um if they are fully retiring, then yeah, generally it could be a really good option. If they're if they're switching just to a new employer, um, if there was other circumstances involved, we're gonna look at a number of different things, their age, uh, when they can start withdrawals from this. So um, yeah, there's probably 10 or so different um areas that we look at if it makes sense for a rollover.

SPEAKER_01 2:24

That's great. So so I guess the key point is it's not a blanket recommendation to roll over. It's something we have to talk about, discuss, analyze, and then we come up with a recommendation for a client.

SPEAKER_00 2:33

Yep, yep. It's definitely not a one-size-fits-all.

SPEAKER_01 2:35

Right. So, you know, typically when I'm talking to a client about whether or not a rollover makes sense, there are usually four different things that a client could do. Okay. They could leave the money at the old uh retirement plan, at the old qualified plan, not necessarily, you know, the great uh, you know, the best decision there. They could roll over to an IRA. Uh, they could potentially roll it into the new retirement plan if they have one, or they could take a cash distribution. More often than not, that cash distribution that is the last uh you know thing that we consider. Um, just doesn't make a whole lot of sense. If you take a cash distribution, that's a fully taxable event. And so usually that doesn't really make sense in a financial plan. Um why don't you talk a little bit about rolling it into the new uh employer's plan, if that's an option for them? That's something that you can do.

SPEAKER_00 3:25

That is an option. So when someone leaves their um current place of employment to move to another location, generally, one way or the other, we're saying it doesn't make a whole lot of sense to leave it at your previous employer. There's no oversight on it. You're not an employee there, so honestly, they just don't really care. So the two scenarios that we see when you work with a new company is roll it into your existing 401k, where you at least have it with the company you're working with, or you can roll it into an IRA and generally get um more professional management oversight.

SPEAKER_01 3:55

So one of the other benefits, Jordan, is is consolidation, right? So I run into a lot of clients uh when they're when they have a separation from service event, and they always they always say, Hey, you know, I also have an old plan somewhere else that I had forgotten about, or you know, I worked for such and such years ago, and I think I have some money there. So when you have that separation from service event, you're thinking about rolling things over, that's a potential consolidation opportunity. Right.

SPEAKER_00 4:20

Yeah, it's surprising actually how much that happens in in meetings that we have with prospects and clients just saying, Oh, I worked this company 20 years ago. I I think I still have a 401k there. And um, yeah, it's really common. So generally, the the more you can consolidate, the easier it's gonna make your life.

SPEAKER_01 4:35

One of the other benefits that we we tend to talk about when it comes to rolling your money out of a qualified plan and into a self-directed IRA is is you typically have more flexibility with regards to distributions, right? When you're in a 401k, again, restrictive. Um, there could be rules on um how often you trade, how how you can get money out. Um you know, and so restrictive doesn't necessarily allow you to manage that a piece of the puzzle um in a holistic fashion. But when you rule it into an IRA, now you have a lot more opportunities as far as not only how you manage it, but how often you can trade, potentially distributions, beneficiary designations, you have a lot more opportunity there.

SPEAKER_00 5:14

Yeah, a lot more opportunity, Roth conversions. It just makes yeah, your life a lot easier.

SPEAKER_01 5:18

Now, um, let's talk about a handful of reasons why you might want to potentially keep it in the old 401k program or 403B or the old qualified plan. Um, you know, what are the, you know, what are the one or two reasons why you might want to keep it there?

SPEAKER_00 5:32

Yeah, and um, like we said, it's not a one size fits all decision. And a couple of the areas that we take into consideration, like we said, age, client circumstance. If the client needs a hardship withdrawal or needs a loan, they could take a loan on their 401k where they couldn't do that in an IRA. So that's why we're always asking questions beforehand to make sure it is the right decision and that the client doesn't need to um, you know, take a loan or withdrawal from it immediately.

SPEAKER_01 5:57

Yeah, that's a big one that a lot of people have um some misconceptions about. If if you have a liquidity need in the near term and the plan that you're leaving allows for in-service distributions or has a pretty lucrative loan provision, it could make sense to leave the money there to take advantage of that. But a lot of the things have to align. The stars have to align, I say, in that you need to have that liquidity need and your plan has to allow for it. So um, you know, that's that's a situation I've seen a handful of time in my career where it makes sense to leave the money there. Um, another big one that we always run into is costs, right? Traditionally, the costs of managing the portfolio in the 401k are low. Uh, it's usually institutional type pricing. Um, you know, there's usually not a large advisory fee on top of it. So traditionally, when you move out of a 401k and into a self-directed IRA, costs do go up. Um, can you speak to why that could make sense, though, for that additional cost? Yeah.

SPEAKER_00 6:55

And again, I think it kind of comes back to having all those investment options that are available. The cost is low because you're really not getting much service. You generally have 10 to 15 different mutual funds to choose from. And now you're working with a professional money management group like YTS that incorporates the investments, the planning, the insurance, um, tax guidance. So a number of different factors that come into play where it will be slightly more expensive. It doesn't mean underperformance, it actually just means more oversight on your overall portfolio.

SPEAKER_01 7:25

Yeah, that's a great point. You know, the the old uh mantra is you get what you pay for kind of kind of deal. And, you know, it doesn't necessarily mean that every client needs the um, you know, the comprehensive wealth management field. They don't need the you know the ongoing advice and monitoring and maintenance that we would provide in in an IRA. Um, perhaps they know what they're doing, perhaps they're savvy enough to manage their 401k and to do it diligently and to to um you know make meaningful changes when it's warranted, but also to stay away from panicking. Um, but quite frankly, a lot of people don't have that. They don't have that knowledge or that wherewithal or that discipline to stay invested, to ride the market, um, to rebalance, right? They don't know what they don't know. And so, you know, yes, you could theoretically stay in a qualified plan at a lower fee. Um, but quite frankly, you can get a lot more value if you are uh looking to have that more holistic approach and to have people actually helping you manage your affairs. Yeah. Um, so it's not just about the costs, you know, that's certainly part of the conversation, um, but it's not the end all be all.

SPEAKER_00 8:30

Yep.

SPEAKER_01 8:31

Um, you know, as as we are having these conversations with clients, we are actually required as advisors and as fiduciaries to take a lot of these things into consideration. In our industry, it's called Reg BI, regulation best interest. And so when we have a client that approaches us and says, hey, I've had a separation from service event, should I roll over my 401k or 403b? Um, it's not just yes, let's do it, right? We do have to go through a process um through the Reg BI uh requirements. And we basically analyze all these things. We analyze the cost difference, the investment difference, um, what other services might the client need. And so that holistic approach really goes into the decision-making factor and whether or not we um recommend a rollover. So, Jordan, one thing that is also unique in our industry, one thing we've had a lot of success with too, um, and again, not necessarily right for everybody, but it is something we we look at and it's part of the reg BI process when we're where we're making these um decisions and helping clients, but it's in-service distributions. Um, why don't you tell us a little bit about what those are and and how you've seen those work?

SPEAKER_00 9:36

Yep. So that's it, it's something flies under the radar, but once you turn 59 and a half, so you're still with your employer, you can do what's called an in-service rollover where your 401k will stay open, but the current balance will move over into an IRA that could be self-directed by you, managed by us. But again, just a way to get more professional management. And um, we have a large number of our clients, once they do hit 59 and a half, they'll reach out to us and we've built trust with them for years, and they'll say, Hey, I now want you to manage um the IRA that's coming from my 401k. Nothing changes, they're still working, they're still getting the company match, but they have the option once they're 59 and a half to do that in-service rollover.

SPEAKER_01 10:18

Yeah, it's it's a great point. Now, it's not available for everybody. The plan has to have that in their summary plan description. So we always ask for the um the SPD or, you know, the plan document that would highlight whether or not that's part of the plan. But if it is, uh, you know, we've seen it work very, very well. You're again, you're you're moving money out of the portfolio, which is restrictive, right? Which has, you know, we'll call it the menu investments you get to pick from. And no one's traditionally no one's helping you manage it. And now you're you're taking that portfolio and and you're moving it to some uh somewhere that you're getting the advice, you're getting the unlimited investment opportunity, you're getting the holistic planning. So it can make a lot of sense. And oh, by the way, you're you haven't left the company. There's no separation from service event. You can still add to the 401k, right? You're still saving. Um, it's just you've moved the chunk of your wealth, the chunk of uh the bigger chunk of your assets into something that you just have a lot more flexibility with. So I think it could make a lot of sense. And again, not something that's a blanket recommendation for everybody, but it's something that we can look at. If it's something that is available to your plan and it makes sense, uh, we go through our analysis, you know, it's something that we've seen a lot of success with. Yep. Um, Jordan, let's switch gears and and now talk about, you know, let's assume the rollover has occurred, let's assume that the money has moved from the 401 or 403B to an IRA. Um, we now, as advisors, we now have uh effectively just, you know, cash, right? That usually comes in the form of a check. Um, and this does surprise some clients. Usually what happens there is not a wire, it's not an ACH. Usually in in today's day and age, and this surprises people, it comes in the form of a check, a paper check.

SPEAKER_00 11:54

Yeah.

SPEAKER_01 11:54

Um that check traditionally comes to either you as the client, uh, to your address of record. I would say that's probably um, you know, seven out of ten times, you know, it goes to them. Handful of times, they'll allow us as the advisor to receive the check, which just makes it easier. Yep. Um, the client doesn't sign or endorse the check, they don't do anything with it, they literally just forward it to us. But now we have cash. We have cash in an account. Um, the question that inherently pops up when that happens is what do I do with that? Do I go all in? Do I invest it right away, right out of the gate, or or do we do something different with it? What do you typically recommend?

SPEAKER_00 12:33

Yep. So generally it's market timing is very, very difficult. So majority of the time we're recommending let's get it in the market. And, you know, with YTS, you're in generally one of our portfolios. It's always our investments that we have the highest conviction on, um, that we feel are the most timely. So we don't really have any um concerns about investing right away. Although I am a big fan of dollar cost averaging for certain situations. It's tried and true. It sounds super boring, but but it definitely works. So um, you know, maybe clients that are significantly more conservative or have different uh withdrawal requirements, then we may consider dollar cost averaging over three months, six months, or a year. Um, but our portfolios are always full of our best ideas at the time. So we generally want to get it invested in the market.

SPEAKER_01 13:23

Yeah. Um, you know, you can't win unless you're in, kind of deal, right? But um, let's talk about dollar cost averaging for for just a moment. So dollar cost averaging is something we kind of just take for granted. I I find that a lot of clients don't necessarily know or understand what that means. But what dollar cost averaging is, is instead of just diving all in all at once and getting every dollar invested all at once, you come up with a plan. You come up with a plan that's either based off of time or different bogies in the market, right? And so, for example, a dollar cost averaging program could say that I'm gonna invest 20% of that money every month for five months until you're fully invested. And what dollar cost averaging does is it's a hedge. It's a hedge against unlucky timing, right? What you're doing there is you're basically putting a little bit of the money to work at the front end, anticipating that there might be volatility or a downturn in the market in the short term, right? That way you don't have all of your money in all at the onset. Um, to your point, Jordan, this is a conservative way of doing it. If we are in a period of high market volatility, for instance, or if the market is, you know, going down uh when you're doing that, it could help you sleep at night, you knowing that not all of your money is in all at once. Um, it also gives you dry powder, right? If if you're doing a slow dollar cost averaging approach into the market, it gives you cash that you could theoretically deploy at a lower level. Um something we can consider, something we always think about when we're talking about putting money to work, whether it's from a rollover or cash in general. Uh, but it's it's not, again, it's not a one one size fits all type of uh of strategy. We we think about it, we incorporate that into the plan uh that we're managing for our clients. And if it makes sense, we can we can utilize it. Um with a dollar cost averaging type of approach, what do you like to do with the cash that potentially you're sitting on as you're waiting to invest it?

SPEAKER_00 15:17

Yep. So majority of the time we're gonna find a liquid money market fund that's paying um the highest rate possible, generally by the, you know, one of the larger banks out there. So we know we have strong backing there. Um, but we want to make sure we're getting the highest rate out there in a in a safe style money market fund.

SPEAKER_01 15:34

So it's just it's not just sitting in cash, it is making something. So at least you're you're making money while you wait. Um again, dollar cost averaging is one of those nuanced programs. Uh, there are actually studies that show that over time, uh, time in the market itself will actually average out your returns. And this, this this might be counterintuitive, but um, you know, there are studies that have been done where you you look at one portfolio where you dollar cost average, you slowly drip into a portfolio and you compare that to that same portfolio that you go all in all at once. Over time, and it's usually seven, eight years down the line, you can't figure out which one is which. Right. And and it goes back to your point that um, you know, we run portfolios in a in an active and ongoing way. Uh, so we're actually we're we're managing portfolios to ride the waves, to ride the dips, um, to avoid the major dislocations, to take advantage of the opportunities that we see. And so, you know, at times it could make sense just to get in, get into the market.

SPEAKER_00 16:35

Yep. Yeah. Tining is just too hard. And um, I did a video on this uh a few months ago called the world's worst market timer. They invested in the top of the market in 1973 and 87 and 2000, 2008, right before COVID. And even if they invested at the very worst times, they still average a little over an 8% return. And that was generally the worst case scenario. So again, like we mentioned, nine times out of 10, it's most makes the most sense just to get it in the market, get it into our top ideas. Um, but there are one-off scenarios where it does make sense to dollar cost average.

SPEAKER_01 17:07

And and uh, you know, that's a great point perhaps to bring it home. Um, you know, not that any of our clients are the worst market timers in the world, but traditionally, when you look at the average investor, right, the average person who who might be a a uh a laborer or a doctor or a lawyer or a mechanic, right? They're not money managers, they're not advisors, they're not looking at this stuff day in and day out like we are. Uh, perhaps they're just not educated, they're not in tune with what's going on in the market or the economy. Those folks, when they're in charge of their own 401k, tend to make bad decisions. They tend to try and trade it. They tend to become irrational when the market's uh getting choppy. And so again, it just speaks to one of the key benefits when we're thinking about rollovers, is you want to have help. You want to have guidance when you can get it.

SPEAKER_00 17:54

Yeah. Yeah. And I think that's what we do best. We we take the emotion out of it. And I think that's really one of the main reasons that we do see retail investors underperform year after year is because they're tied to the emotion of their investments. They're they're connected to who's in office right now or other geopolitical events, and they let that kind of cloud their judgment. Um, and that's where we can kind of cut in and take the emotion out of things and just look at um, look at the fundamentals and and look at the technicals in the market and find the best opportunities for investments.

SPEAKER_01 18:25

Yeah, that's great. So, Jordan, while uh while we have you, um, you know, one of the one of the things that I'm really excited about is to be a part of the uh you know the podcasting family here. But you've been doing a podcast now at YTS for over a year or so, uh, off the charts. Uh, I love it. I'm a huge fan of it. Um, why don't you go ahead and give a little plug for for your podcast?

SPEAKER_00 18:46

Yeah, thanks, Mike. Yeah, off the charts has been fun. We've been doing it for um coming up on two years now. And um, you know, a lot of it is questions that I'm getting in in client meetings or or things I'm seeing on the news. I'll find a chart that's related to that, really try to simplify it down to a two to three minute video that everyone can understand and um try to have more of an optimistic vibe to it as well, where there's so much negativity in the world. But yeah, it's it's always timely. And um, yeah, check it out on uh on YouTube.

SPEAKER_01 19:13

Yeah, certainly do. And and I would highly recommend that. It does, it does give you some insight, it gives you um some knowledge and some visual uh confirmation for something that's going on out in the real world. People have a lot of questions about. So I think it's uh I think it's a great value add and appreciate you doing it. Maybe one of these days you can invite me on to that one.

SPEAKER_00 19:30

Love to have you.

SPEAKER_01 19:32

And again, I appreciate you coming in and having this discussion. It's something we deal with on a daily basis, something we hear uh from clients, both existing clients, prospective clients, just people on the street. Um, and so I appreciate you coming and sharing your insight with us.

SPEAKER_00 19:45

Yep, Mike, thanks for having me.

SPEAKER_01 19:47

Of course. So uh again, the Beyond Your Money podcast, the goal with this podcast is to educate, it's to inform, it's to empower our clients to make good decisions so that it's it's not just uh your investment, it's not just your 529, it's not just your 401k, this is your whole financial picture. And uh and so we want to make sure that we help our clients do things holistically and so that everything complements what you're doing, both with your finances, with your family, and with your career. So uh so again, it's your money, it's your life, take control.