The Roll of the Adviser

It’s back to the old days for advising on rollovers, right? Maybe not. The Department of Labor (DOL)’s revised fiduciary rule, vacated by a 5th Circuit Court of Appeals mandate in June, no longer applies—but don’t be surprised if it has a lasting impact on how plan sponsors scrutinize rollover advice from advisers.

“An adviser certainly has to look at the demise of the revised rule as a positive, in terms of eliminating the technical tripwires,” says attorney Andrew Oringer, a partner in the New York City office of law firm Dechert LLP. “But I’m not sure that the result will be a return to the [previous] status quo, as if we’re all in a time machine. The revised rule heightened awareness about the potential conflicts of interest in connection with advice regarding rollovers.”

It is unlikely that all plan sponsors will demand that advisers act as fiduciaries when they discuss rollovers with the participants in their plan, Oringer says. “But I would think that a fair number of plan sponsors, especially the larger ones, will want to pay attention to what’s happening with rollover discussions.­ I certainly don’t think people will be trying to comply with rules that no longer exist. But I do believe there will be continued trending to sponsors encouraging advisers to take into account a participant’s best interests in providing information and advice on rollovers,” he says.

The demise of the revised fiduciary rule comes as plan sponsors are beginning to take more interest in providing help to their employees nearing retirement, says Douglas Webster, managing director at SageView Advisory Group in Knoxville, Tennessee. “Their employees are looking to [them] for direction on how to prepare for retirement. They want to know, ‘How do I make this transition? Where do I go?’” he says. “So sponsors are having more conversations with us about providing resources for that transition, and utilizing plan design and investment options that are more distribution-phase friendly. We are very much seeing a trend of sponsors wanting to encourage people to keep their assets in the plan.”

Three Key Sponsor Decisions

If a plan sponsor wants an adviser’s help to think through distribution-phase issues, it first needs to decide whether it prefers that departing employees keep their money in the company plan or roll it out of the plan. “It’s a timely question, with what we just went through with the DOL rule,” says Scott Matheson, managing director and defined contribution (DC) practice leader at CAPTRUST in Raleigh, North Carolina. “Before that, most plan sponsors had not given thought to that question in particular.”

Sponsors considering the upside of people staying in the plan should think about the economic benefits, Matheson says. “You end up with larger account balances in the plan, and the larger asset base gives the plan more purchasing power for negotiating recordkeeping and other administrative fees,” he says.

Employers also get benefits from a work-force management standpoint when they turn their 401(k) from a capital-accumulation plan into a true retirement plan, Matheson says. “Offering a ‘cradle to grave’ retirement plan can be a good idea if an employer is trying to solve for recruitment, retention and retirement issues,” he says. “But if they don’t have the final ‘retirement’ leg of the stool—and it’s just ‘OK, good luck out there’—it can be very hard as an employer to convincingly tell that story.”

Pensionmark Financial Group LLC advisers talk to sponsors about the benefits but also the challenges of reaching departed employees who remain in the plan, says Jennifer Tanck, the firm’s executive vice president and chief compliance officer, in Santa Barbara, California. “The No. 1 ‘con’ is, how much control do employers have over terminated participants? They have to receive all the same disclosures and notices as the employer’s active participants. But these are the folks who tend to forget to tell their previous employer when they move, and then the employer has to track them down to give them the required notices.

“Add to that when former employees get divorced, and all of a sudden there’s a QDRO [qualified domestic relations order] involved, adding another terminated account,” he continues. “Also, if the sponsor decides to move from one recordkeeper to another, all participants must receive conversion disclosures, including re-enrollment and fund changes, which can be cumbersome and costly.”

Attorney Bruce Ashton often hears employers say that when a former employee remains in the plan, they have taken on additional fiduciary responsibility and risk for someone who no longer even works there. “If you assume that former employees are more likely to become disgruntled, to become ‘squeaky wheels,’ there is that risk,” says Ashton, a partner at Drinker Biddle & Reath LLP in Los Angeles. “But as long as the plan is operated appropriately and the sponsor carries out its fiduciary responsibilities properly, it is not giving its former employees much to squeak about.”

Weighing the pros and cons of departed employees staying in the plan, Ashton says, “The pro of lower costs generally outweighs the cons of squeaky wheels and having to ensure that former employees get all the required notices.”

Second, employers who elect to let money remain in the plan need to think about providing retirees with helpful distribution options, Matheson says. They should consider not just adding alternatives such as systematic withdrawals, but also keeping the costs low for retirees who utilize those options, he says.

“Plan sponsors have not been uniform in having good distribution options beyond lump sums, to encourage people to stay in [the] plan,” he says. “But just providing lump sums does not give retirees a way to carry through a sustainable withdrawal strategy or to do multiple periodic withdrawals.”

While Webster sees more plan sponsor interest in offering distribution options that are tailored to retirees, he has yet to see many sponsors adopt in-plan annuities, due to concerns such as complexity and fees. “I think we’re going to see continued advancement in technology and robo-advice solutions that will give these participants improved personalization for investment and distribution options,” he says. “Maybe those solutions will integrate some insurance-based products, but I think that [approach] will be packaged under more of a managed account solution, rather than offered as a stand-alone option in the plan.”

And third, employers thinking about distribution-phase issues should decide whether they want an adviser to educate their participants about distribution options or, instead, advise them. “There’s no doubt that, because of the DOL rule, employers are now very aware that [advisers] could be talking to their participants about rollovers,” says attorney David Kaleda, a partner at Groom Law Group, Chartered, in Washington, D.C. “Some of them like the idea that if anybody is going to offer their participants rollover recommendations, he should always act in the participants’ best interests. It will be interesting to see if many sponsors insist that you, as an adviser, have to contractually agree to act as a fiduciary if you want to give their participants advice on rollovers.”

In the purely legal sense, it is now as if the DOL’s revised fiduciary rule never existed, Oringer says. “But the amended rule heightened sensitivity to these conflicts of interest. And I’d think that advisers would want to at least consider, from a business perspective, whether they want to go all the way back to the way things were. For a financial institution to say, as its default to clients’ terminating employees, ‘Roll over your money to me,’ there’s a business reason to consider whether that makes sense. You may not necessarily have regulatory problems, but if sponsors get mad at you for doing things they think are inappropriate, maybe you’ve won the battle but lost the war.”

The Education-vs.-Advice Line

Three sets of regulations cover advisers’ work on distribution options, only one of which was established by the DOL, says attorney Carol Buckmann, co-founding partner of law firm Cohen & Buckmann PC in New York City.

With the fiduciary rule’s demise, Advisory Opinion 2005-23A, issued in 2005, resumes as the DOL’s main guidance. “In that opinion, the DOL said that unless an adviser is already a fiduciary to a plan, a recommendation to a participant to do a rollover is not a fiduciary function,” she says.

“Basically, what the DOL said in 2005-23A is that, No. 1, advising a participant on whether to take a distribution is not inherently fiduciary investment advice,” Ashton agrees. “But what it also said is that if you, as an adviser, are already a fiduciary to a plan, then your distribution advice is fiduciary advice and is subject to the ERISA [Employee Retirement Income Security Act] fiduciary rules. If you are not already a fiduciary to that plan, then it’s not fiduciary advice.”

The Securities and Exchange Commission (SEC) also has a voice on rollover advice. In April, it voted to propose a package of “Regulation Best Interest” rules and interpretations aimed at enhancing the quality and transparency of the relationships investors have with advisers and broker/dealers (B/Ds). “The new SEC ‘best interest’ proposal, which may or may not be enacted, is apparently intended to cover rollover advice,” Buckmann says.

“The [SEC’s] position seems to be that if you make a recommendation to do a rollover, that’s really a recommendation to liquidate the securities an investor holds in a plan account, and that’s an investment recommendation covered by SEC rules,” she says. “Even if you’re a broker and not an RIA [registered investment adviser], the advice you give on doing a rollover would have to be in the best interest of the participant.” However, the agency has not yet clearly defined what that means, she adds.

Regulatory Notice 13-45, issued in 2013 by the Financial Industry Regulatory Authority (FINRA), gives advisers guidance regarding the line between education and advice on distribution options. “FINRA 13-45 basically says that when you give a recommendation regarding a distribution, that’s inherently an investment recommendation,” Ashton says.

Notice 13-45 also lays out what advisers need to do to stay on the education side of a distribution discussion. “You can talk about what the participant’s alternatives are and what the pros and cons are of each of those alternatives,” Ashton says. That means objectively discussing the four options a terminating participant has: leave his money in the former employer’s plan; roll over the assets to a new employer’s plan, if that is permitted; roll over the money to an individual retirement account (IRA); or take a lump sum for the account’s value.

“If you remain neutral about the alternatives and don’t make any recommendation on what the participant should do, you are going to satisfy the education requirements,” he says. “You can’t provide any discussion of the pros and cons with a, ‘Wink, wink, rolling over to an IRA is better.’”

But what if a participant then asks something along the lines of, “Can you please just tell me what I should do?” For advisers who want to remain on the education side, Ashton says, “In the politest way you can, you have to tell the participant something like, ‘I’m sorry, but I can’t make a recommendation on what you should do. You have to make that assessment, and I’ve tried to provide you with information to help you make that decision.’”

Kaleda sums up this discussion: “You don’t say what the participant should do. You describe what the participant could do,” he says. “And you describe the pros and cons of each option in a balanced way.”

CAPTRUST sticks to education when discussing distribution options with participants and does not give distribution advice, Matheson says. “We have not felt it is appropriate for us to step over that line,” he says.

CAPTRUST views it as a conflict not just to advise participants to do a rollover to its wealth management division, but to advise them to leave their money in a client’s 401(k) plan. “More often than not, our services are paid for by the plan, meaning they are paid for by participants,” Matheson says. “If we recommend that a terminating participant stay in the plan—even if it’s for good reasons such as lower costs and better fiduciary oversight—maybe we make an extra $40 a year if that person then stays in the plan.”

FINRA 13-45 serves as a guideline for CAPTRUST on the parameters of its educational distribution-phase talks with participants. The advisory firm also customizes these conversations based on each plan sponsor client’s distribution provisions and the distribution options offered by the plan’s recordkeeper, Matheson says.

“We will talk through with the participants the four options they have, as outlined in FINRA 13-45, and the generic considerations for each of those options,” he says. “When we have those conversations, it is pretty structured, in terms of staying on a script. We’re strict on the compliance aspect of that conversation so that we don’t inadvertently give somebody advice on a rollover.”

Advice on Advice

Advisers willing to cross the fiduciary line in giving advice on distribution options need a solid, objective process for doing it, Kaleda says. “You could read the DOL regs to say, ‘I can make recommendations without crossing the fiduciary line, and thus a prudent process under ERISA is not required,’” he says. “But FINRA has said that if you recommend that an investor do a rollover, and in that context you make a securities recommendation, you have to have some process in place.”

FINRA 13-45 provides guidance on the process advisers who give advice on distribution options need to follow. “It is pretty clear what FINRA thinks: You have a ‘suitability’ obligation that requires you to have a solid process to establish why your recommendation is in the interest of the investor,” Kaleda says.

The information given to a participant to support fiduciary advice on distribution options should be specific to the individual, Oringer suggests. “At some point, a fiduciary adviser will want to do an analysis of whether an individual participant’s best interests are to stay in the plan or move his money out of the plan. It won’t be one size fits all.”

FINRA 13-45 says that advisers have to make a “reasonable inquiry” into the participant’s distribution options and compare factors including the investments, services and expenses, Buckmann says. For example, it says the adviser should take into account whether the person getting advice is satisfied with the investment options in the employer’s plan or prefers the broader array of investments available in an IRA.

SageView will give fiduciary distribution advice to a sponsor client’s participants, Webster says. “The sponsor is asking us, ‘Can you be that independent [fiduciary adviser] voice who will help the retiring participant make decisions? Will you help our participants weigh , when they retire, their decision on the benefits of keeping their money in the plan vs. rolling it over to an IRA?’ When we act in a 3(21) fiduciary role to the plan, the sponsor sometimes also will ask us to give advice to help its 55-and-older employees understand the issues affecting their decisions on Social Security, Medicare and the [other] components they need to prepare for retirement,” he says.

But before it gives distribution advice, SageView utilizes its comprehensive financial planning tools to first help a participant understand his retirement income goals and distribution goals. “Once he understands those, we communicate to him about what investment and distribution options are available within the employer’s plan to meet those goals,” Webster says. “If those options can’t meet the participant’s needs, plan B is, ‘What’s available outside the plan?’”

At plans advised by Pensionmark, terminating participants who want to ask about their distribution options often start with its call center. “That discussion is 100% strictly educational,” Tanck says. If a participant then wants to get advice on his distribution options, that happens at the individual adviser level. Many times, the Pensionmark plan adviser refers the participant to a firm adviser who focuses primarily on wealth management, though some plan advisers have both specialties.

“We have a lot of plan advisers who have no interest in doing individual wealth management,” Tanck says. “They’re very focused on being plan advisers. From a compliance perspective, I would prefer an individual rolling out of a plan to receive advice from a wealth management specialist.” It helps ensure they will get the advice and service they need, she says.

Even if a Pensionmark plan adviser who does take on individual business handles it, the advisory firm gives clear written disclosure to the investor about the implications of transitioning from plan participant to wealth management client, Tanck says. “The disclosure spells out exactly what extra services he will get from that adviser as an individual client and what the cost of those services will be,” she says. “The fee itself is only part of the story: There has to be value for that extra fee.

Keep Your Eyes Open

The Department of Labor (DOL)’s revised fiduciary rule may have been vacated, but sources say advisers should keep their eye on the following developments, which could affect their distribution-phase work:

• The DOL clarifying its stand. There is some industry concern that the DOL staff, having put together the revised fiduciary rule, no longer stands behind the previously issued Advisory Opinion 2005-23A, says Groom Law Group’s David Kaleda. “Some folks are hoping the DOL clarifies where it stands on that.”

The agency’s revised rule did provide significant clarity about distinguishing education from advice, says Jennifer Tanck of Pensionmark. However, with those rules vacated, “we are hoping the DOL will again give us a solid framework about education vs. advice, through new guidance.”

• The SEC adopting its “best interest” proposal.  The currently pending proposal by the Securities and Exchange Commission (SEC) suggests that an adviser’s recommendation to do a distribution and rollover would be subject to best interest SEC regulations, even if the adviser does not serve as a fiduciary under the Employee Retirement Income Security Act (ERISA), says Bruce Ashton of Drinker Biddle & Reath. “They are not the rules now, but I expect that something eventually will be finalized,” he says.

The SEC’s best interest proposal has many similarities to the DOL’s vacated fiduciary rule, but there are still many questions, Tanck says. “We understood what acting in someone’s best interest meant under the DOL rule, but we don’t yet know what ‘best interest’ means according to the SEC.”

• States moving forward on their own rules.  “For example, Nevada passed legislation that took effect last year, and it says that if you give an investment recommendation to a client, or if you give financial planning advice, then you are a fiduciary,” Ashton says. “It strikes me that what Nevada is doing is just the tip of the iceberg and that other states will do similar things.”

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