Rollovers and Fiduciaries
Art by Tim Bower
ADVISER QUESTION: I’m an RIA [registered investment adviser] who provides advisory services to individuals. If I recommend that a client roll over plan monies to an IRA [individual retirement account] that I manage, am I considered an ERISA [Employee Retirement Income Security Act] fiduciary? And, if so, what do I need to do, to comply with ERISA fiduciary rules?
ANSWER: Yes. Under the Department of Labor (DOL)’s expanded interpretation of fiduciary advice, you’ll be considered an ERISA fiduciary under these circumstances because your rollover recommendation is the first step in providing ongoing advice in the IRA. This means you will need to satisfy ERISA’s fiduciary standard of care. Also, in order to avoid a prohibited transaction, you’ll need to comply with DOL Prohibited Transaction Exemption (PTE) 2020-02.
The DOL recently issued guidance expanding the scope of the ERISA fiduciary advice definition, and this new interpretation affects rollover recommendations even if you have no pre-existing relationship with the plan or the plan participant. By way of background, under the DOL fiduciary advice definition, you’re a fiduciary if you are: 1) providing advice about investments for a fee, 2) on a regular basis, 3) under a mutual understanding, 4) if that advice will form a primary basis for the investment decision, and 5) if that advice is individualized based upon the investor’s particular needs. If the advice or recommendations satisfy the five-part definition, the firm and the adviser are fiduciaries.
The DOL expanded its interpretation of the regular basis component. Under its new interpretation, you are providing advice on a regular basis: 1) if you have a pre-existing advice relationship with the participant on tax-qualified retirement assets—e.g., advising on another IRA—or 2) if you anticipate that the rollover recommendation is the first step in an ongoing financial relationship concerning tax-qualified retirement assets—e.g., the rollover IRA.
Here, you’ll be a fiduciary under the five-part test with respect to the rollover recommendation. You’ll be receiving a fee as a result of the advice—e.g., the advisory fee from the IRA—under a mutual understanding with the participant as evidenced by the IRA advisory agreement. The rollover advice is the first step in an ongoing relationship as the adviser to the IRA. And the advice is individualized for that participant and is a primary basis for the rollover and investing decisions.
As an ERISA fiduciary, you’ll need to ensure that the rollover advice satisfies the ERISA prudence standard and duty of loyalty. You will also need to consider the prohibited transaction rules. A prohibited transaction occurs because you’ll be receiving compensation that you wouldn’t have otherwise. This is self-dealing by a fiduciary, which is prohibited by ERISA and the Internal Revenue Code (IRC). Both ERISA and the IRC apply to rollover advice, but only the IRC is relevant to advice for IRAs.
The good news is that you can rely on the PTE, which became effective on February 16, to receive the IRA fee as long as you satisfy the exemption’s conditions. These demand:
| • | Compliance with a standard of care—i.e., the impartial conduct standards—requiring: 1) satisfaction of a best interest standard, which is identical to the ERISA duty of prudence and loyalty; 2) reasonable compensation and best execution; and 3) making no materially misleading statements; and |
| • | A disclosure to the participant explaining the specific reasons why the rollover recommendation is in his best interest, acknowledging your fiduciary status and describing your services and any material conflicts of interest. |
Also, the PTE requires policies and procedures to ensure compliance with the exemption’s conditions. The application of the policies must be reviewed annually, and the review must be documented in a report that is certified by a senior executive officer.
While the PTE is already effective, the DOL has issued, with the IRS’ agreement, a nonenforcement policy that says the DOL will not pursue prohibited transaction claims against investment advice fiduciaries so long as the advice satisfies the impartial conduct standards. However, the nonenforcement policy expires on December 20. But you’ll have until then to develop your policies and procedures and disclosure documents. Stay tuned for more on this topic in the July/August issue, where we’ll discuss what the DOL guidance says about the prudent process for rollover recommendations.
Fred Reish is chairman of the financial services ERISA practice at law firm Faegre Drinker Biddle & Reath LLP. Joan Neri, a nationally recognized expert in employee benefits law, 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.