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New Fiduciary Rule Provides More Protection for Rollover Advice

by | Oct 5, 2020

Saving for a secure retirement may seem simple – you put away a certain amount with each paycheck and let it grow until you retire. However, many factors can reduce the value of retirement savings, leading to a less secure “golden age.”

When changing jobs, many participants spend the plan distributions they receive rather than continuing to earmark their accounts for retirement. Rolling over the account to an inappropriate IRA can also jeopardize a secure retirement. The advice participants receive is crucial for making decisions that enhance retirement security, since high fees and poor investments can eat away at retirement savings.

Government regulators and many pension professionals have been concerned that some participants getting plan distributions were receiving conflicted advice from non-fiduciary advisers, resulting in rollovers that were not in their best interest. The recommended IRAs could have high fees and commissions and less than optimal investments. Participants might also be giving up some favorable benefits, such as the deferral of tax on appreciation of employer stock, or the ability to take nontaxable loans from their plan accounts, without realizing it when they move their assets to an IRA.

Fiduciary vs. Non-Fiduciary Advice

Under ERISA, a fiduciary must always give advice solely in the participants’ best interest. A non-fiduciary is not required to do so. Fiduciaries can also be liable for losses caused by a fiduciary breach. Under the Obama administration’s prior fiduciary rule, which is no longer in effect, all IRA recommendations were subject to a fiduciary standard. The Department of Labor’s recently released Fiduciary Rule (the Rule) takes a more limited approach. The Rule imposes higher standards on fiduciaries giving rollover advice. However, fewer advisors would be subject to a fiduciary standard than under the Obama administration’s Fiduciary Rule. The new Rule is similar to the SEC’s Reg BI that recently became effective for retail accounts.

Here’s what would and would not change under the new standards for rollover advice:

When Is an Advisor a Fiduciary?

The Rule reinstates a five-part test contained in regulations issued shortly after the enactment of ERISA. Under this test, a person giving investment advice is not a fiduciary unless ALL five requirements are satisfied. The five requirements mandate that the advice:

  • Must relate to the value or advisability of purchasing or selling securities or other property
  • Be for direct or indirect compensation
  • Be provided on a regular basis
  • Be given pursuant to an understanding that it would be a primary basis for decisions
  • Take the particular needs of the participant into account

When is Advice Given on a Regular Basis?

A key requirement for rollover advice is that the advice be provided “on a regular basis”. Some advisors took the position (based on a DOL opinion) that their rollover advice was not subject to a fiduciary standard because they had no pre-existing relationship with the participants. Therefore, it was “one-time advice”.

The Rule makes this argument a non-starter by applying an expansive definition of when advice is provided on a regular basis. Under the Rule, advice can be on a “regular basis” if the advisor has been providing advice to the plan’s fiduciaries or will be providing advice to the participant about later IRA investments. This interpretation will make more advisors fiduciaries.

Other Issues Under the Five-Part Test

The five-part test also requires the recommendations to be a primary basis for plan decisions. The DOL has consistently said there can be more than one primary basis for decisions, but it did not change the test to require only that the recommendations be simply “a basis” for participant decisions. However, the DOL has stated that the understanding that advice would be a primary basis for decisions need not be in writing. It also stated that fiduciary disclaimers will not necessarily be recognized.

What Must a Fiduciary Do to Satisfy the Rule?

If an advisor satisfies the five-part test and is making a rollover recommendation in a fiduciary capacity, the advisor must utilize a prohibited transaction exemption in order to receive compensation such as commissions or 12b-1 fees. This exemption requires the advisor to acknowledge fiduciary status in writing, disclose any conflicts and fees, and make a determination that a rollover is in the participant’s best interest. Under the general requirements, the compensation must also be reasonable in relation to the services provided, and steps must be taken to mitigate conflicts of interest.

A fiduciary giving rollover advice must avoid making misleading statements, and must document in writing the reasons the recommendations serve the participant’s best interest. In making this determination, the fiduciary should review the investments available to the participant and the fees that would be imposed if the account is left in the plan, and compare them to the proposed IRA investments.

For example, a participant might be eligible for institutional class shares available only to large investors in the plan, but only retail share classes with higher fees for substantially the same investments made through a smaller IRA account. A plan might have access to collective trusts and other investment vehicles that may not be available to the IRA. On the other hand, an IRA may give the participant access to a broader range of investments than the plan does, and may have no or a low annual fee. In addition to the IRA compensation structure, the services made available under the IRA arrangement will also be relevant in determining that a recommended rollover is in the participant’s best interest.

Sales Contests Are Banned

Even if the exemption provisions are otherwise satisfied, sales contests, which have been a source of criticism because they may incentivize conflicted advice, would be barred by the Rule.

What Has Been Dropped?

The Obama administration rule required a written agreement between the participant and the rollover advisor, and allowed the participant to sue the advisor if the contract provisions were violated. These protections have been dropped from the Rule, and it appears that the Rule cannot be enforced by private individuals. Since the DOL’s ability to sue for individual violations is limited, this omission could seriously hamper enforcement of the Rule’s protections. Presumably, participants can still sue for fiduciary breach if the advice they receive is imprudent.

Looking Ahead

Many public comments have been filed supporting and criticizing the Rule. A hearing at which interested parties testified was held on September 3rd. It is possible that some provisions of the Rule, including those that apply to rollover advice, might be changed or watered down as a result of these public comments. We might also see more protections for those receiving advice or even a replacement rule if we have a change in administration in 2021.

About the Author

Carol I. Buckmann, JD, is the co-founding partner of Cohen & Buckmann, P.C. She is one of the top-rated employee benefits and ERISA attorneys in the U.S., and deals with some of the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities, and investment fund formation.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.


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Take it or Leave it

Each year, approximately five million Americans with small retirement accounts (currently defined as having balances of less than $7,000) change jobs – and at that point are forced to make a decision.

Recent Posts

Take it or Leave it

Each year, approximately five million Americans with small retirement accounts (currently defined as having balances of less than $7,000) change jobs – and at that point are forced to make a decision.


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