“We demand rigidly defined areas of doubt and uncertainty!” — Douglas Adams, The Hitchhiker’s Guide to the Galaxy
Roughly two years ago, shortly after the Department of Labor’s infamous fiduciary rule was finalized, I wrote an article titled “Silver Linings Playbook: 401k Rollovers Post-DOL Fiduciary”.
The premise was that after over a decade of being competitively disadvantaged, retirement plan advisors who serve their clients in a fiduciary capacity under ERISA would soon be treated the same way as their non-fiduciary “retail” counterparts.
The short-lived fiduciary rule provided that anyone who received compensation in connection with recommending a rollover would have been considered an ERISA fiduciary.
If the “transaction” resulted in greater compensation being paid to the advisor, his/ her supervising firm or an affiliate, it would have been considered self-dealing and a prohibited transaction (PT) under ERISA.
The Best Interest Contract Exemption (BICE), which would have provided relief from the PT (and allowed the compensation to be properly received), is now only available until the expiration of the DOL’s temporary enforcement policy.
When that will occur is anybody’s guess. The DOL did say shortly after the vacatur was official that it would provide further clarification and guidance on how firms should go about unwinding the requirements imposed by the fiduciary rule.
While this result may be welcome news to retail advisors, fiduciary plan advisors are back to square one—operating under the cloud of doubt and uncertainty.
The nationwide vacatur of the fiduciary rule means that we revert to where we were before the rule (and its related PT exemptions) became applicable.
It also means that any DOL guidance that was superseded by the rule (i.e., the DOL’s Advisory Opinion 2005-23A) is back in play.
Put differently, “every silver lining’s got a touch of grey.”
The Advisory Opinion says a couple of things: first, it clearly states that if an advisor is not serving in a fiduciary capacity under ERISA (e.g., to the plan or a participant), he/she will not become a fiduciary simply by recommending an IRA rollover, nor will he/ she be subject to resulting PT for self-dealing because it only applies to ERISA fiduciaries; secondly, (and much more problematic for plan advisors) it cautions that if a “plan officer or someone who is already a plan fiduciary” does the following:
- uses the authority that makes him/her a fiduciary;
- to “cause” a participant to take a distribution from the plan; and
- recommends the proceeds be reinvested in a way that results in higher compensation paid to the advisor, his/ her supervising firm or an affiliate …
… he/she may be engaging in a PT under ERISA 406(b)(1) (a.k.a. the prohibition
against self-dealing).
It’s important to note that all three parts of the test must be satisfied before the DOL would suggest that the advisor “may” be engaging in a PT.
Consequently, we have long advised plan advisors, who may also advise participants regarding rollover IRAs, to implement procedural safeguards in the form of enhanced disclosures, policies/procedures and training specifically designed to mitigate the risk of satisfying the first two parts of the test.
As discussed in my previous column, the third part is a given as advisors frequently do (and should) charge a higher fee for the additional, personalized work involved in advising or managing a participant’s IRA (versus the pro rata share of the advisor’s plan-level fee that he/she would have received had the participant stayed invested in the plan).
For many plan advisors, their “fiduciary authority” (as referenced in the first part of the test) emanates from advice or discretion in the boardroom (as compared to the breakroom); they provide fiduciary services at the plan-level but do not deliver advice on a regular basis to individual participants or have discretion over the investment of participants’ accounts.
Consequently, it’s less likely that one could successfully argue that such advisors used their fiduciary authority to cause a participant to do anything–let alone liquidate their plan investments to roll over to an IRA advised or managed by the plan advisor or someone else at his/her firm.
These advisors would be in what we consider to be the yellow zone and should proceed with caution when recommending rollovers.
With respect to the second part of the test, we recommend that advisors implement procedures that require the participant to unilaterally determine to leave the plan (and to attest to that fact in writing) before the plan advisor (or any advisor affiliated with the plan advisor) recommends they roll over their account to the plan advisor’s firm.
This policy will help cut against the argument the advisor “caused” the participant to take the distribution from the plan.
On the other hand, an advisor who serves individual participants in a fiduciary capacity is more at risk of satisfying the first part of the test. Perhaps the Advisory Opinion is signaling the DOL’s concern that an unsophisticated participant may “rubberstamp” any recommendation their fiduciary advisory provides— including one to take money out of the plan and invest with the advisor?
Again, it’s a grey area. And because it’s more difficult for these advisors to protect against satisfying the first part of the test, we would classify them as being in the red zone or having the most risk when it comes to recommending rollovers.
It may still be possible to avoid the likelihood of engaging in a PT—provided the advisor can demonstrate that the participant had already decided to leave the plan before the advisor began discussing options relating to reinvesting the proceeds in a rollover IRA.
The advisor may be able to show that he/she didn’t “cause” the participant to take the distribution or satisfy the second part of the test in other words.
PT risk is only one aspect of potential exposure for plan advisors, however.
Fiduciaries must also act prudently. The duty of prudence, at a minimum, requires the advisor to consider relevant information or that which he/she should know to be relevant in order to arrive at a well-informed recommendation.
In the context of recommending a rollover, the advisor should carefully evaluate the needs of the participant in light of the value he/she is receiving in the current plan or could receive in a new plan (if applicable) and/or an IRA.
The BICE described four categories of information that would have been required to be analyzed and documented in order to ensure the recommendation was in the “best interest” of the participant (versus simply in the advisor’s own financial interest). Those categories included comparing:
- investments;
- services;
- fees and expenses; and
- whether the employer is paying any of the administrative expenses associated with the plan on behalf of the participant.
Given the scrutiny of rollover recommendations by other regulators (i.e., FINRA and SEC), we recommend advisors continue to evaluate rollovers pursuant to these criteria—regardless of whether it’s required by DOL rules. If you are aiming to satisfy the DOL’s criteria for best interest, then you will likely exceed the bar set by other regulators (e.g., suitability).
As is often the case, the best defense is a good offense, and anytime a regulator gives you a roadmap to compliance, you are well-served to follow it.
That said, there is no “silver bullet” here and it’s critical for advisors to check with their supervising firms to make sure they are following internal policies/procedures when it comes to recommending IRA rollovers.
It’s one thing to aspire to do more than what may be required by gathering more information and better documenting the basis of your recommendations but quite another to bake a higher standard into your compliance procedures.
While it has been rumored that the DOL is poised to publish clarifying guidance—specifically relating to the application of the 2005 Advisory Opinion—it remains uncertain whether and when this will occur.
Given the DOL’s recognition of the valuable role fiduciary plan advisors play in shepherding participants towards a timely and dignified retirement (e.g., when it carved out some of the more onerous conditions of the BICE for “Level Fee Fiduciaries”), we remain optimistic that any clarifying guidance will seek to place fiduciary advisors on a more level playing field vis-à-vis their retail (non-fiduciary) counterparts.
In the meantime, “try to keep a little grace” and aim for a higher standard of care.
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
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.
