401(k) Rollovers to IRAs

Art by Tim BowerADVISER QUESTION: How does the delay of the DOL [Department of Labor] fiduciary rule affect my responsibilities when I recommend that participants take distributions from an ERISA [Employee Retirement Income Security Act] plan and roll them over to an IRA [individual retirement account] that I will advise?

ANSWER: The provision in the DOL fiduciary rule that says distribution and rollover recommendations are fiduciary advice was not changed; it was only delayed from April 10 to June 9. Therefore, any rollover recommendation on or after June 9 will be deemed fiduciary advice and will require a prudent process and an exemption from the prohibited transaction rules.

On and after June 9, you will engage in a fiduciary act under ERISA when you recommend that an ERISA plan participant take a distribution and roll it over to an IRA. This means you will need to adhere to ERISA’s prudent man standard and duty of loyalty.

To do that, you will need to consider all relevant factors, including the investments available under the existing plan and the proposed IRA, the different levels of services, and the fees and expenses associated with both savings vehicles, including whether the employer pays for some of the plan’s expenses. You need to evaluate those relevant factors to determine whether recommending the rollover is appropriate based on the participant’s needs and circumstances.

In addition to satisfying the ERISA standard of conduct, you need to consider the prohibited transaction rules. Under these rules, if you receive compensation that you would not have absent the recommendation—here, the IRA advisory fee—you will be committing a prohibited transaction. In order to receive this prohibited compensation, you need to use an exemption. The exemption you will most likely use is the best interest contract (BIC) exemption.

The good news is that most of the difficult conditions of the BIC exemption are delayed until January 1, 2018; these include the disclosure requirements, representations of fiduciary compliance, and warranties about firm policies and procedures. The only requirement that must be met from June 9 through December 31 is compliance with the rule’s impartial conduct standards (ICS).

The ICS has three parts: You may not be paid any more than reasonable compensation; you may not make any materially misleading statements; and you must satisfy the best interest standard of care, which is virtually identical to ERISA’s prudent man standard of conduct and duty of loyalty.

Both the best interest and prudent man standards require that you make diligent and prudent efforts to obtain information about the existing ERISA plan. If you are a fiduciary adviser to the participants’ plan, you will have the relevant information. On the other hand, if you are not the plan’s adviser, you need to obtain the relevant information from the participant.

 The participant disclosure statement—i.e., the 404a-5 disclosure—is an important document for this purpose. It has information about the plan’s designated investment options, including expense ratios and performance history. Also, quarterly participant statements show how each participant is invested and whether any fees or expenses have been charged against his account.

There may be instances, however, where the participant is unwilling to provide information or where you are otherwise unable to obtain information you need. In its frequently asked questions issued under the DOL fiduciary rule (FAQ 14), the department indicated that, in such instances, you may rely on alternative data sources—e.g., the most recent annual return (Form 5500) or reliable benchmarks on typical fees and expenses for the type and size of plan—as long as: 1) prudent efforts were first undertaken to obtain the plan information, and 2) the data source’s limitations are properly disclosed in writing.

Even though documenting your actions is not required, it is a good practice to do so because it proves that a prudent and best interest process was used to make the rollover recommendation. For advisers who currently provide ERISA fiduciary services, this process will be familiar, but for advisers unfamiliar with these concepts, it will probably be necessary to modify their current procedures.

Fred Reish is chair of the Financial Services ERISA practice at the law firm Drinker, Biddle & Reath. A nationally recognized expert in employee benefits law, Reish has written four books and many articles on the Employee Retirement Income Security Act (ERISA), Internal Revenue Service (IRS) and Department of Labor (DOL) audits, as well as pension plan disputes. Joan Neri, who has been associated with the firm since 1988, is counsel on the Employee Benefits and Executive Compensation Practice Group. Her practice focuses on all aspects of employee benefits counseling.