Dealing With Rollovers Under the DOL Fiduciary Rule

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For advisors holding themselves out as providers of fiduciary advice to plan participants, the DOL Rollover Opinion provides that they cannot capture rollover assets from this client base. Furthermore, the DOL Rollover Opinion indicates that advisors providing such fiduciary advice, even if inadvertently, will also be treated as subject to the restrictions described in the Rollover Opinion. However, consistent with the Rollover Opinion's reliance on the Supreme Court decision of Varity v. Howe, many believed that an advisor engaged to provide plan-level fiduciary services, would not be acting as a fiduciary when acting in a wholly separate non-fiduciary capacity, such as selling personal rollover services unrelated to its status as a plan fiduciary. Unfortunately, the DOL guidance in this area was rather murky.

The DOL's new fiduciary rule supersedes and replaces the DOL's existing rollover guidance as articulated in Advisory Opinion 2005-23A. In contrast to this Rollover Opinion, under the DOL's new and broader definition of fiduciary advice, any and all rollover recommendations would generally be viewed as fiduciary advice. In fact, a recommendation for a participant to take a rollover distribution would be viewed as fiduciary advice, even if the advisor does not include any actual investment recommendations along with the rollover recommendation. The resulting rollover advice would then automatically cause the advisor to become a plan or IRA fiduciary.

As previously noted, fee-based advisors may also need relief under the Best Interest Contract (BIC) Exemption when offering rollover advice where there is no pre-existing relationship with the participant and plan or recommendations are directed to existing retirement clients to convert from commission-based to fee-based arrangements. The DOL has stated that when a level fee fiduciary recommends a rollover from an ERISA plan to an IRA, a rollover from another IRA, as well as a switch from a commissioned-based account to a fee-based account, in order to qualify for the BIC exemption, the fiduciary must document the reasons why the level fee arrangement was considered to be in the IRA owner's best interest. In the case of rollover from an Employee Retirement Income Security Act plan, or ERISA plan, this documentation includes:

• identifying the consequences of alternatives to the recommendation (such as leaving the money in the plan);

• any fees and expenses associated with the plan and the IRA, whether the employer pays for some or all of the plan's administrative expenses;

• the distinct levels of services under the plan and the IRA; and

• different investments available under each option.

This analysis and documentation of the retirement investor's individual needs and circumstances is similar to the requirements of FINRA Notice 13-45. 

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Similarly, where a level fee arrangement is recommended as part of a rollover from another IRA or a switch from a commission-based account, consideration must be given to the services that will be provided for the fee.

Compliance with FINRA Notice 13-45

Advisors making recommendations to roll over plan assets to an IRA should also ensure that they conform with FINRA Notice 13-45 which means that the advice must be reasonably based on its suitability for the plan participant. This requires the advisor to consider the participant's investment profile, including the participant's:

• age;

• investments outside the plan;

• financial situation;

• tax status;

• investment goals and experience;

• investment time horizon;

• liquidity needs;

• risk tolerance; and

• any other information the participant may disclose.

The rollover decision should reflect how the plan from which assets would be distributed stacks up in comparison to the proposed IRA in terms of investment options, fees and expenses, and services (such as advice planning tools). Furthermore, differences with respect to potential withdrawal penalties, protection from creditors and the applicability of required minimum distributions need to be considered.

As previously noted, there is generally a financial incentive for advisors to recommend a rollover to an IRA. To meet FINRA requirements, advisors must not let this conflicting interest impair their judgment of what is in a plan participant's best interest. Firms that employ advisors must have written supervisory procedures designed to ensure that marketing of IRA accounts meet these requirements. Among other things, this will require training of representatives regarding the implications of the rollover decision.

—-Read Warning on IRA Rollovers: Regulators to Scrutinize Suitability on ThinkAdvisor.

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