IRA-to-IRA Transfers

Art by Tim BowerADVISER QUESTION: Does the DOL [Department of Labor] fiduciary rule apply when I recommend that an IRA [individual retirement account] owner transfer his IRA account to one that I will advise?

ANSWER: Yes. Any recommendation that an IRA owner transfer his IRA to one you advise is fiduciary advice and will require a thoughtful, thorough and well-documented fiduciary process along with an exemption from the prohibited transaction rules.

Under the DOL fiduciary rule, it is a fiduciary act to recommend rollovers and transfers from an existing retirement account, including an IRA, to an IRA you advise. And, because the fiduciary advice results in compensation you would not have received absent the recommendation—namely, the advisory fee—it is a prohibited transaction. However, you will still be able to provide the advice and keep the fee if you satisfy a prohibited transaction exemption (PTE) known as the best interest contract exemption (BICE).

During the transition period, this June 9 through December 31—or possibly beyond that if the transition period is extended—only three conditions of the BIC need to be satisfied. They are referred to as the impartial conduct standards and require that:

• The advice be in the IRA owner’s “best interest”—a standard that mirrors the Employee Retirement Income Security Act (ERISA) prudent man standard and the duty of loyalty;
  
  
• The compensation does not exceed a reasonable amount, which requires a comparison, or benchmarking, of your fees with the fees of other advisers who provide comparable services; and
  
  
• Statements to the IRA owner about material conflicts of interest, fees and other relevant matters must not be materially misleading.

Let’s focus on the best interest standard and what that means in the context of recommending a transfer of an IRA.

To satisfy this standard, you need to examine the relevant factors concerning the possible transfer and evaluate them in light of the investment objectives, financial circumstances and needs of the IRA owner. For an IRA-to-IRA transfer, the relevant factors would include, at the least, the investments, services and expenses in the current IRA as compared with those available in the IRA that you propose. In other words, you need to obtain that information about the current IRA and compare that with the prospective one. If the investments and services are comparable, but your fees are less expensive, then that difference may justify a best interest recommendation to transfer.

Or instead, let’s suppose the investments and expenses in both IRAs are similar, but the services differ. In that instance, your focus should be on identifying the services that best align with the IRA owner’s investment objectives, risk tolerance, time horizons, and financial needs and circumstances. For example, if you provide services not offered under the existing IRA—such as investment strategies that support sustainable retirement income withdrawals for the investor’s lifetime—then those services may justify a recommendation to transfer the IRA under the best interest standard. 

This process should be documented, so that you will be able to prove that your recommendation was in the IRA owner’s best interest. The documents should include the information gathered about the existing IRA—i.e., investments, fees and services—the IRA you advise, and a profile, questionnaire or other “know your customer” form that can serve as the basis for establishing that the recommendation aligns with the IRA owner’s best interest.

Fortunately, the DOL has announced a nonenforcement policy saying it will not penalize those who are “working diligently and in good faith” to comply with the fiduciary rule during the transition period. And the Internal Revenue Service (IRS) has said it will also abide by this nonenforcement policy.

However, the policy does not apply with the Securities and Exchange Commission (SEC), FINRA and private claimants. For this reason, the documents should be retained in a retrievable format as protection against a private claim by the IRA owner or in the event of an SEC or FINRA examination. 

Compliance with the best interest standard requires a process that is thorough, thoughtful and well-documented. You should examine your current business practices to determine what additional procedures you may need to follow in order to satisfy this fiduciary standard.

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.