Broadening Your Business
How to deal with the DoL’s campaign against cross-selling
Reported by Marcia S. Wagner
The need to find this line arises from the Department of Labor’s (DoL’s) campaign to curb the perceived abuses associated with “cross-selling,” which it recently defined as “using existing clients, plan participants and beneficiaries…to market additional services or products.” The DoL believes that cross-selling is prone to abuse when it results in fees being received by an adviser in connection with rollovers to individual retirement accounts (IRAs). In Advisory Opinion 2005-23A, the DoL first articulated its position that responding to participant questions concerning the advisability of taking a distribution or the investment of the amount withdrawn could have fiduciary ramifications.
Advisory Opinion 2005-23A
Advisory Opinion 2005-23A posed three questions, the first of which asks whether an adviser who receives a fee for advising a plan participant on how to invest plan assets or for managing the participant’s account is an investment advice fiduciary. Unsurprisingly, the answer was that a participant-level adviser’s directing the investments of a plan made the adviser a fiduciary because of the adviser’s “control” over plan assets.
The second question has caused much uncertainty with respect to whether an adviser’s recommendation that a participant roll over his or her account balance to an IRA to take advantage of investment options not available under the plan constitutes investment advice with respect to plan assets. The advisory opinion answered this question in the negative, because a recommendation to take a distribution does not constitute advice pertaining to plan investments and a recommendation with regard to the investment of withdrawal proceeds concerns funds that are no longer plan assets.
This apparently liberal response was followed by elaboration that was both confusing and far more restrictive. The DoL stated that, while the adviser would not be an investment advice fiduciary, the adviser would, if he or she were already a plan fiduciary, still be under the obligations of a fiduciary with respect to the advisor’s rollover recommendations, because the adviser would be “exercising discretionary authority respecting management of the plan.” Under the plan management rationale, the adviser would be subject to fiduciary duties even in responding to participant questions as to the “advisability” of taking a distribution or as to the manner of its investment. The DoL went on to point out that, if the adviser exercises control over the plan assets so as to cause the participant to take a distribution and roll it into an IRA generating fees for the adviser, a prohibited transaction could result, because plan assets would have been used for the adviser’s benefit.
The third question raised in the advisory opinion was whether a recommendation by an adviser not “connected with” the plan relating to distributions and the investment of distribution proceeds is investment advice or the exercise of control over plan assets, either one of which would make the adviser giving the recommendation a fiduciary. The answer was no, but it still left open the question as to the exact nature of the connection that will get an adviser into trouble. Nevertheless, it is clear that, in the DoL’s view, being a plan fiduciary on some other basis would suffice.
The DoL’s position that, if an adviser has some connection with a plan that makes him a fiduciary, then he becomes a manager of plan assets when he makes any recommendation regarding rollovers and/or their investment is unconvincing. This allows no room for the possibility that the adviser may be operating in a nonfiduciary role when engaging in financial planning regarding rollover.
In other words, in order to decide whether an adviser is a plan manager, it is necessary to look at the facts and circumstances of each case. You cannot simply impose a blanket rule, as the DoL seems to have done, that turns everyone who happens to have a plan connection into a plan manager if he provides financial planning services as to distributions and rollovers.
Part 2 of this article will examine ways that financial advisers can ensure that they comply with Advisory Opinion 2005-23A.
Marcia S. Wagner is an expert in a variety of employee benefits issues and executive compensation matters, including qualified and nonqualified retirement plans, and welfare benefit arrangements. A summa cum laude graduate of Cornell University and Harvard Law School, she has practiced for 23 years. Wagner is a frequent lecturer and has authored several books and numerous articles.