Rollovers Under the Fiduciary Rule

Art by Tim BowerADVISER QUESTION: I’m an adviser who provides investment advice to ERISA [Employee Retirement Income Security Act] plan committees. I also provide wealth management and financial planning services to individuals. Under the final Department of Labor [DOL] fiduciary rule, will I be able to advise plan participants or wealth management clients about their distribution options under a plan or an individual retirement account [IRA]?

ANSWER: The rule, which applies starting April 10, 2017, does allow you to provide distribution or rollover advice; however, there are special requirements for doing that.

The first thing to consider is, what constitutes fiduciary “advice” in this context. Under the DOL’s rule, such advice includes recommendations about:

• Whether to roll over or to take a distribution from a plan or an IRA;
• The form and amount of a distribution;
• The destination of the distribution—e.g., where it should be invested;
• A particular IRA provider; or
• The type of account—i.e., brokerage vs. fee-based.

If your communication could reasonably be viewed as a “suggestion” that the investor engage in any of those steps, it is a fiduciary recommendation. That is true even if you have no prior relationship with the plan or the individual. For example, if you met a prospective client and recommended that he transfer his IRA to you, that would be a fiduciary recommendation.

On the other hand, if the only information you give a retirement plan participant is unbiased education about his distribution options, and the considerations for each of those options, it would not be a recommendation and, therefore, would not be fiduciary advice. That said, what are the consequences of making a fiduciary recommendation to a participant about distributions and rollovers?

First, you will need to satisfy the fiduciary standards of prudence and loyalty, referred to as the “best interest” standard of care. To satisfy that standard, you will need to consider, at the least: the investment expenses in the plan and the IRA; the cost of advice in the plan and the IRA; administrative expenses in the plan and the IRA; and the range of services and investments in both.

After evaluating that information, you will need to make a recommendation that is in the best interest of the participant. In some cases, that could require a recommendation that the participant leave his money in the plan.

Also, you will need to comply with the new contract and disclosure requirements. If a participant takes your advice and rolls over the distribution to an IRA that you advise, you will earn a fee in the IRA that you would not have earned but for the recommendation. That fee is a prohibited transaction. This is because you used your fiduciary status to cause yourself to receive additional compensation.

The good news is that there is an exemption from the prohibited transaction—the best interest contract (BIC) exemption for level fee fiduciaries. To qualify for this exemption, you, your firm and any affiliates it may have would need to receive a level fee such as a percentage of assets or a flat fee, disclosed in advance. You would also need to:

• Acknowledge fiduciary status in writing;
• Abide by “impartial conduct” requirements—i.e., adhere to the fiduciary standard of care, receive no more than reasonable compensation or make no material misleading statements; and
• If the transaction is a rollover from a plan to an IRA, document why making it is in the participant’s best interest.

If you are not a level fee fiduciary for the IRA, you need to satisfy all of the BIC exemption requirements. These additional requirements include adoption of extensive disclosures and warranties as well as policies and procedures to identify and mitigate conflicts of interest. Also, if the recommendation is to invest in an IRA, your firm would need to agree that both you and the firm will adhere to these standards in a contract that is enforceable by the IRA owner.

Although distribution and rollover advice may be provided under the rule, you will need to take steps to avoid a prohibited transaction. You need to develop a prudent process to support that your recommendation is prudent and in the best interest of the participant or IRA owner, to document that process and to satisfy the BIC exemption conditions.

Note: If you are a fiduciary adviser to a plan, your ability to make rollover recommendations to participants in that plan is regulated by current guidance (see DOL Advisory Opinion 2005-23A).

Fred Reish is chair of the Financial Services ERISA practice at the law firm Dirnker, 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.