Compliance December 30, 2013

FINRA to Examine IRA Rollovers

Reviewing firm practices for recommending and marketing individual retirement account (IRA) rollover services will be a 2014 priority for the Financial Industry Regulatory Authority (FINRA).
Reported by

In Regulatory Notice 13-45, FINRA says it plans to take a close look at the way financial services firms—especially broker/dealers—make recommendations to participants in employer-sponsored retirement plans who terminate their employment and must decide how to invest accumulated plan assets.

The notice outlines four options available to participants leaving an employer-sponsored plan. These include the following, which can be used in combination if circumstances permit:

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

  • Leave the money in the former plan, if permitted;
  • Roll over the assets to a new employer’s plan, if one is available and rollovers are permitted;
  • Roll over the assets into an IRA; or
  • Cash out the account value.

Each choice offers advantages and disadvantages, FINRA explains, depending on the desired investment options, advice services, fees and expenses, withdrawal strategy, required minimum distributions, tax treatment and a list of other considerations. The complexity of these choices leads many investors to seek assistance from a financial professional—especially broker/dealers, as about 98% of IRAs with $25,000 or less are brokerage accounts, according to the Employee Benefits Security Administration.

The regulatory notice explains that an adviser or broker/dealer’s recommendations on these options usually involves securities, bringing the advice under FINRA’s regulatory oversight. A firm’s marketing of its IRA services is subject to FINRA rules for largely the same reason, according to the notice.

That means any advice to sell, purchase or hold securities as related to IRA rollovers or the other options must be “suitable” for the customer and the information that investors receive must be fair, balanced and not misleading. The notice goes on to provide guidance on rollover activities, intended to help firms ensure that they have policies and procedures in place that are reasonably designed to achieve compliance with relevant FINRA rules.

One piece of guidance warns advisers and broker/dealers that an IRA often enables an investor to select from a broader range of investment options than a typical 401(k) plan. The importance of this factor depends in part on how satisfied the investor is with the options available through the plan under consideration. For example, an investor who is satisfied by low-cost institutional funds may not regard an IRA’s broader array of investments as attractive—implying an IRA rollover may not be the most suitable option for that investor.

Another important consideration for determining suitability is the level of fees and expenses associated with rollovers, and how they will impact investor assets. Other suitability factors to consider, according to FINRA, are penalty-free withdrawals, protection from creditor and legal judgments, required minimum distributions and employer stock options, among others.

FINRA also warns that rollovers can easily become a source of conflicts of interest for advisers and broker/dealers. That’s because firms and their registered representatives that recommend an investor roll over plan assets into an IRA typically earn a commission or other fees as a result, while a recommendation to keep assets in an old employer’s plan likely results in little or no compensation.

Conflicts may also exist for firms and their representatives that are responsible for educating plan participants about rollover choices. For example, if a representative receives compensation for the number of IRAs that participants open at his firm, he has an incentive to encourage participants to open IRAs rather than maintain their assets in their former employer’s plan.

For their part, firms are required under FINRA regulations to supervise these activities to reasonably ensure that conflicts of interest do not impair the judgment of a registered representative or any other associated person about what is in the customer’s interest.

Also included in the regulatory notice is a section on suitability and fair dealing.

According to FINRA, implicit in all broker/dealer and adviser relationships with customers is the fundamental responsibility for fair dealing. The notice points out that Rule 2111, better known as FINRA’s suitability rule, requires that a broker/dealer have a reasonable basis to believe that a recommended transaction or investment strategy involving a security is suitable for the customer.

Under this standard, a firm and its registered representatives must consider the customer’s investment profile, including the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the broker/dealer or registered representative in connection with the rollover recommendation.

In closing, the regulatory notice also makes recommendations for broker/dealers regarding operational supervision and control systems, the training of registered representatives and communications with the public.

FINRA is not the only regulatory agency taking a second look at the way financial services firms market and recommend IRA rollovers. The Department of Labor (DOL) has repeatedly warned that pending regulatory changes could add certain IRA rollovers to the its list of transactions prohibited under the Employee Retirement Income Security Act (see “New Restrictions Loom for IRA Rollovers”).

The complete text of Regulatory Notice 13-45 is available here.

Compliance December 30, 2013

DOL Issues 2014 Retirement Plan Pipeline

The retirement industry is anticipating a fiduciary re-definition and rules about lifetime income illustrations for plan participants, but there is much more in the pipeline.
Reported by

In its regulatory agenda, the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) says it anticipates issuing a proposed rule regarding lifetime income illustrations on participants’ retirement account statements in August 2014. The new proposed definition of fiduciary—or as the EBSA now calls it, the conflict-of-interest rule—is also slated for August.

The agency also says it will review the use of brokerage windows in participant-directed individual account retirement plans covered by the Employee Retirement Income Security Act (ERISA). Instead of offering a limited number of investment options chosen by a plan fiduciary, a brokerage window may give plan participants access to a broad range of diverse investment alternatives available on the market. This rulemaking project will explore whether, and to what extent, regulatory guidance on fiduciary requirements and regulatory safeguards for such arrangements are appropriate for plans that allow participants to direct investments through brokerage windows (see “Rules/Regs: Brokerage Window-Only Plans Could Be Problematic”). EBSA expects to begin this review by issuing a Request for Information in April 2014.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Final rules issued in 2012 require covered service providers to make certain disclosures to responsible plan fiduciaries in order for contracts or arrangements between the parties to be considered reasonable under Section 408(b)(2) of ERISA. The agency anticipates amending the disclosure provisions so that covered service providers may be required to furnish a guide or similar tool along with such disclosures. A guide or similar requirement may assist fiduciaries, especially fiduciaries to small and medium-sized plans, in identifying and understanding the potentially complex disclosure documents that are provided to them or if disclosures are located in multiple documents. EBSA plans to issue a notice of proposed rulemaking (NPRM) in January 2014.

In 2008, the DOL issued a regulation pursuant to Section 404 of ERISA that establishes a safe harbor for satisfaction of fiduciary responsibilities in selecting an annuity provider and contract for benefit distributions from an individual account retirement plan. More recently, the DOL and the Department of the Treasury published a Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans (RFI), seeking comments about what measures they could take to encourage such plans to offer annuities or other arrangements that provide a lifetime stream of income after retirement (see “Feds Call for Lifetime Income Product Public Comment”). Based on the RFI comments, the EBSA is developing proposed amendments to the annuity selection safe harbor primarily focused on the condition in the safe harbor relating to the ability of the annuity provider to make all future payments under the annuity contract. The agency plans to issue an NPRM in October 2014.

EBSA also plans to finalize rules for annual funding notices and summary annual reports for defined benefit (DB) plans. The proposed rule was issued in November 2010 (see "EBSA Releases DB Funding Notice Proposed Rule”), with a comment period that ended in January 2011. The EBSA plans to issue a final rule in March 2014.

Plan sponsors can also look for an amendment to the DOL’s qualified default investment alternative (QDIA) regulation, which provides relief from certain fiduciary responsibilities for fiduciaries of participant-directed individual account plans who, in the absence of directions from a participant, invest the participant's account in a QDIA. The amendment will provide more specificity to fiduciaries as to the investment information that must be disclosed in the required notice to participants and beneficiaries. This amendment also will enhance the information that must be disclosed concerning target-date, or similar age-based, QDIAs. The proposed rulemaking also will amend the participant-level disclosure regulation under ERISA Section 404a-5 to require the disclosure of the same information concerning target date or similar investments to all participants and beneficiaries in participant-directed individual account plans. The EBSA issued a proposed rule in November 2010 (see “EBSA Unveils Target-Date Disclosure Proposal”). It plans to issue a final rule in March 2014.

On April 21, 2006, the DOL published a package of regulations, collectively titled Termination of Abandoned Individual Account Plans, which facilitate the termination of, and distribution of benefits from, individual account pension plans that have been abandoned by their sponsoring employers. In 2014, it will examine whether, and how, to amend those regulations by expanding the scope of individuals entitled to be a "qualified termination administrator" (QTA). Under the Termination of Abandoned Individual Account Plans regulations, only a QTA is authorized to determine whether an individual account plan is abandoned and to carry out related activities necessary to the termination and winding up of the plan's affairs. A proposed rule was issued in December 2012 (see "DOL Suggests Abandoned Plan Use by Bankruptcy Trustees”). The agency plans to issue a final rule in April 2014.

The Patient Protection and Affordable Care Act of 2010 (or ACA) amended Title I of ERISA, by adding a new Section 715 which encompasses various health reform provisions of the Public Health Service (PHS) Act. EBSA is working on regulations provide guidance on the 90-day waiting period limitation under Section 2708 of the PHS Act and making technical amendments to regulations to conform to ACA provisions already in effect, as well as those that will become effective in 2014 (see “SECOND OPINIONS: Proposed Regulations on 90-Day Waiting Period Limitation”). The agency expects to issue a final rule in February 2014.

The DOL's regulatory agenda may be downloaded from here.

«