4 Steps for 401k Rollovers Post-DOL Fiduciary

How do they benefit 401(k) specialists

Some considerations for rollovers in the post-DOL fiduciary rule climate.Some considerations for rollovers in the post-DOL fiduciary rule climate.

(From 401(k) Specialist, Issue 3, 2016)

“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.” — Alexander Graham Bell

While there is no doubt that the Department of Labor’s new Fiduciary Rule will create additional challenges for advisors serving “retirement investors,” there are a couple of overlooked and important opportunities for 401(k) plan specialists. Under current regulatory guidance, DOL Advisory Opinion 2005-23A, if an advisor is already serving in a fiduciary capacity, the DOL cautions that if he/she: i) uses the authority that makes him/her a fiduciary; ii) to “cause” a participant to take a distribution from the plan (i.e., an IRA rollover); and iii) recommends the proceeds be invested in a way that causes the advisor or his/her affiliate(s) to receive additional compensation, then the advisor may engage in a prohibited transaction under ERISA Sec. 406(b).

Given the individualized nature of the IRA services, it’s almost a given that advisors will (and should) charge a higher advisory fee for an IRA than the fee they would negotiate for providing plan-level advisory services. Consequently, we have cautioned plan specialists to carefully evaluate their fiduciary activities and ensure they do not use such authority to cause participants to roll over their plan account to an IRA advised or managed by the advisor (or any of his/her affiliates).

The potential exposure increases when the advisor’s fiduciary status emanates from advice or management relating to a participant’s individual account as, presumably, the advisor would be in a position to exert more influence over the participant’s decision-making. The DOL seemed to be concerned that an unsophisticated participant may simply “rubberstamp” any recommendation the advisor makes, including one to move assets out of the plan to an account that would pay the advisor greater compensation.

This increased prohibited transaction risk led many plan specialists to forego opportunities to work with participants post retirement. On the other hand, those financial professionals who have no relationship with the participant or his/her plan would not be serving in a fiduciary capacity and, therefore, are not subject to ERISA’s prohibited transaction rules. These non-fiduciary advisors have been free to affirmatively solicit IRA rollovers from plan participants.

The DOL’s new Fiduciary Rule has leveled the playing field. After the rule’s “applicability date” of April 10, 2017, any advisor who recommends that a participant take a distribution from his/her plan will be considered a fiduciary with respect to that advice. Additionally, they will be considered a fiduciary when they recommend investments in the IRA. There is no more “green zone” in other words.

So how does this benefit 401(k) specialists?

We believe there are three primary ways that plan advisors will be in the catbird seat relative to their non-fiduciary counterparts. First, most 401(k) plan specialists already serve in fiduciary capacity and charge level asset-based or fixed fees. If the plan advisor recommends a rollover to an advisory (vs. brokerage) IRA, they can operate under the less onerous “streamlined” Level Fee Fiduciary Best Interest Contract Exemption (“BICE”). Additionally, plan advisors understand the requirements of engaging in a prudent process and acting in their clients’ best interests.

Secondly, because they are already receiving compensation in connection with the services they provide to the plan or the participant, they have a lower “delta” to defend under the BICE. For example, consider the plan advisor who receives 25 bps of total plan assets for his/her plan-level services. If the participant stays invested in the plan, the advisor will continue to receive 25 bps on those assets. If the advisor recommends a rollover to an advisory IRA that will pay the advisor a one percent advisory fee, then he/she must demonstrate that notwithstanding the 75 bps of increased compensation, the rollover IRA is in the participant’s best interest.

On the other hand, if an advisor has no relationship with the plan or participant, then he/she will receive zero bps if the participant stays invested in the plan. This formerly non-fiduciary advisor will have a 100 bps delta to defend when he/she makes a recommendation to the same one percent advisory IRA.

In addition to the requirement that the advisor charge no more than reasonable compensation, the Level Fee Fiduciary BICE requires the advisor to document the basis for his/her recommendation as being in the participant’s best interests.

Specifically, the documentation “must take into account the fees and expenses associated with both the plan and the IRA; whether the employer pays for some or all of the plan’s administrative expenses; and the different levels of services and different investments available under each option.” Given the plan advisor’s familiarity with the plan for which they currently serve, and the 401(k) specialist’s knowledge concerning plan operations and expenses generally, he/ she should be able to readily decipher the necessary information (e.g., from the annual 404a-5 participant fee disclosure). Financial professionals that are less experienced in plan-related matters will likely struggle with this requirement and are less likely to be able to compare “apples to apples.”

Nevertheless, the rules are technical and each participant’s needs will be different. Even 401(k) plan specialists should proceed with caution are carefully follow the policies of their supervising firms when recommending IRA rollovers. The steps below are indented to provide a basic “playbook” for complying with the new requirements:

Step 1: Carefully identify and document the participant’s needs (e.g., are they looking for holistic, ongoing wealth management services, individualized retirement income planning, more sophisticated investments or strategies, etc. that may not be available if they stay invested in the plan?);

Step 2: Compare the participant’s needs with the benefits and limitations of staying in the plan (or rolling over to a new plan if available) vs. the IRA (e.g., is the participant utilizing and will they continue to utilize in-plan features and services that are paid for from charges against the participant’s investments or deducted from their plan account?);

Step 3: Propose and document a recommendation that aligns with the participant’s needs and the basis for why the IRA solution is in his/her best interests (e.g., if the participant needs are not capable of being met by staying invested in the plan and he/she is likely to be paying for features and services that are not going to be utilized, then an IRA may be a more appropriate vehicle); and

Step 4: Document the value of the advisory services in the IRA in light of the participant’s needs (e.g., the nature, scope and frequency of the IRA services, the background, experience and credentials of the IRA advisor, etc.).

Jason C. Roberts, Esq. is the CEO of Pension Resource Institute, a consulting firm delivering competitive and compliant solutions for retirement advisors, and a Partner at Retirement Law Group, a law firm specializing in ERISA- and securities-related matters.

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