IRA Rollovers

Art by Tim Bower

ADVISER QUESTION: I am an independent registered investment adviser [RIA] who provides discretionary investment management services to individual retirement accounts [IRAs] and charges an asset-based fee. Occasionally, I recommend that a plan participant roll over a plan distribution to an IRA that I manage. How does the Department of Labor [DOL] fiduciary rule affect these activities?

ANSWER: The DOL fiduciary rule does not impact the ongoing discretionary investment management services provided to the IRA. Those are fiduciary services under the Internal Revenue Code (IRC), are not subject to a DOL fiduciary standard of conduct, and do not constitute a prohibited transaction (PT), because you charge a level fee. On the other hand, the rollover recommendation is a fiduciary act under the DOL rules and is subject to the Employee Retirement Income Security Act (ERISA) standard of conduct. Also, in most instances, the rollover recommendation will result in a PT for which an exemption such as the best interest contract exemption (BICE) is needed. 

The IRC and ERISA have the same definition of fiduciary investment advice. The only difference is that ERISA imposes a standard of care on fiduciaries—i.e., the prudent man standard and the duty of loyalty—and the IRC does not.

Regulations under both ERISA and the IRC say that a person is a fiduciary when he has discretion to manage plan or IRA assets. The new DOL fiduciary rule does not change that definition. As a result, you have been—and will continue to be—a fiduciary under the IRC when providing discretionary investment management services to IRA accounts. Note that only the IRC, not ERISA, applies to giving fiduciary advice to IRAs.

Also, if you charge only a reasonable level fee, and if you are “independent”—i.e., no related parties or affiliates receive compensation as a result of your investment decisions—then your discretionary investment management services will not result in a PT. By level fee, we mean a fee that does not vary based upon your investment decisions.

There is another definition of fiduciary under the IRC and ERISA that says a person is a fiduciary when he provides investment advice for a fee. The new DOL fiduciary regulation significantly expands the activities that constitute fiduciary advice. The DOL’s expanded definition includes recommendations to a plan participant to take a distribution from a plan and roll it over to an IRA.

Under this definition, when you recommend that a participant take a distribution and roll it into an IRA you manage, you are acting as a nondiscretionary fiduciary adviser for this purpose under ERISA because you are providing advice about ERISA plan assets for a fee—i.e., the IRA management fee to be paid from the rolled-over assets. This means you will need to adhere to ERISA’s prudent man standard and duty of loyalty. To do that, you need to compare the services, fees and expenses of the plan with those of the IRA and determine whether recommending the rollover is appropriate based on the participant’s needs and circumstances.  

Also, as you will be receiving compensation—the IRA management fee on the rolled over assets—you will be committing a PT for which an exemption is needed. The best interest contract exemption (BICE) would  be unavailable if you had control—i.e., discretion—over the rollover decision. But, under your facts, that is not the case because the participant makes the decision to accept or reject your rollover recommendation. As a result, you can use the BICE as an exception to the PT. The DOL confirmed this in its first set of frequently asked questions (FAQ). To satisfy the BICE, you need to comply with the Impartial Conduct Standards (ICS) during the transition period that ends this December 31, although likely to be extended to 2019. The ICS require that you: 1) satisfy the best interest standard of care—in essence, identical to ERISA’s prudent man standard and duty of loyalty; 2) charge no more than reasonable compensation; and 3) make no materially misleading statements.

Thus, you will be subject to the new fiduciary standard under both ERISA and the BICE for the rollover recommendation. Then, your discretionary investment management services for the IRA will not be subject to a standard of conduct under either the IRC or ERISA.

Fred Reish is chair of the financial services Employee Retirement Income Security Act (ERISA) practice at the law firm of Drinker Biddle & Reath LLP. A nationally recognized expert in employee benefits law, Reish has written four books and many articles on ERISA, pension plan disputes, and audits by the Internal Revenue Service and Department of Labor. Joan Neri is counsel in the firm’s financial services ERISA practice, where she focuses on all aspects of ERISA compliance affecting registered investment advisers and other plan service providers.