Optimizing Your Practice to Capture Rollovers

Judging whether conflict of interest rules permit an adviser to recommend rollovers—under both current law and the pending fiduciary redefinition—hinges on three important considerations.

Jason Roberts, founder and CEO of the retirement services consulting firm Pension Resource Institute, explains rollover recommendations have long been on the Department of Labor’s (DOL) radar. For that reason he predicts advisers already serving as fiduciaries for retirement plan clients will likely not face a fundamental shift in the sorts of rollover recommendations that constitute prohibited transactions under the Employee Retirement Income Security Act (ERISA) when new fiduciary rules finally come through—though the fiduciary net may be widened to include more types of advice relationships.

The DOL could deliver new rules as soon as August, but observers say it is likelier the fiduciary redefinition will be delayed once again and will not be released until after the midterm elections, in late 2014 or early 2015. Other regulators, including the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) are kicking around rule changes of their own related to rollovers, cross-selling and fiduciary status (see “Some Advisers May Want to Pause on Rollovers”).

The regulators say they are examining whether emerging technologies and business models cause previously overlooked conflicts of interest. Concern about individual retirement account (IRA) rollovers in particular is growing, as an estimated $2.1 trillion is expected to flow from defined contribution (DC) retirement plans into IRAs in just the next five years (see “An Inside Perspective on Rollover Rulemaking”).

To get a sense of where they stand on the matter, Roberts says advisers should turn to the DOL’s 2005 advisory opinion that sets forth the department’s position on marketing additional services and products to plan participants and beneficiaries. The opinion points to three factors that advisers should be aware of while considering whether they face an inherent conflict of interest when recommending clients move money away from an employer-sponsored plan and into an IRA.

The important facts, Roberts says, are whether an adviser uses the authority that makes him a fiduciary to cause a participant to take a distribution—and whether the advice to move assets is coupled with a recommendation to invest the proceeds in a manner that results in greater compensation being paid to the fiduciary or his affiliates. An adviser who hits all three triggers—i.e., who 1) utilizes his position as a fiduciary to 2) cause a rollover that 3) results in higher compensation for himself or his colleagues—may be violating ERISA section 406(b), Roberts says.

That’s true now, and it certainly will still be true if the fiduciary definition gets strengthened or applied more broadly, Roberts says.

Advisers are most at risk of triggering a prohibited transaction when they provide individualized, ongoing investment advice to plan participants or have discretion over the plan’s designated investment alternatives, Roberts adds. In that case it is easier to see how an adviser’s recommendation could be seen to “cause” a rollover “through” his fiduciary standing. 

And it’s also apparent how a conflict of interest could arise when the assets are rolled into a vehicle that brings higher earnings for the adviser or his firm through fees or commissions. Advisers have more protection when their role is limited to providing general education on rollover options and the participants are clearly directing their own rollover decisions, Roberts says.

Richard Schwamb, a senior financial adviser and senior vice president for wealth management at Merrill Lynch, says that fact has caused significant pushback across the industry since the DOL first proposed a fiduciary redefinition back in 2010, with many advisers arguing that their input is needed most when participants approach retirement and must decide among the options available when exiting a DC plan. Left to consider the options on their own, Schwamb says, many participants get overwhelmed and choose to simply leave their money where it is, regardless of whether that is the best option. Or, in the absence of direction from a trusted adviser, participants are forced to heed the advice of non-fiduciaries, which may or may not be given in their best interest. 

Another complaint often floated by advisers during the rollover discussion, Schwamb says, is that the DOL doe not seem to appreciate the fact that while an IRA account can drain more in fees and investment expenses, it isn’t necessarily an inferior option. He says IRAs often provide access to a wider investment universe than a DC plan account. Additionally, it can be helpful for retirees in setting appropriate asset allocations when monies from disparate retirement plan accounts are brought together into a single IRA, forming a more comprehensive picture of the retiree's finances.

Roberts agrees. The plan-exiting strategy an adviser recommends should hinge on the following factors, which are listed in FINRA Regulatory Notice 13-45, issued in December 2013 as a reminder to broker/dealers of the requirements they face when recommending rollovers, he says. Advisers must provide participants with clarity on:  

  • The various investment options in each distribution option;
  • The fees and expenses in each option;
  • The advice and support services under each option;
  • Whether an option comes with tax or distribution penalties;
  • The different levels of protection from creditors and legal judgments;
  • The minimum distribution requirements that apply to each option; and
  • The tax consequences of significantly appreciated or highly concentrated positions in employer stock or other assets.

Schwamb and Roberts agree that advisers who provide regular and ongoing investment advice directly to participants about specific decisions and circumstances—and who therefore may be at greater risk of triggering prohibited transactions under 406(b)—can do a lot to protect their own interests by educating clients and making disclosures on these factors.

Schwamb and Roberts addressed the fiduciary redefinition and its impact on rollover practices during the NAPA 401(k) Summit, hosted by the National Association of Plan Advisers (NAPA) in New Orleans.