Regulators compete for slice of IRA rollover pie

Rollovers used to be the 'Wild West' of regulation; now advisers need to watch out for new rules

Mar 24, 2014 @ 10:36 am

By Darla Mercado

The next big area for regulatory development and risk management for advisers is here: rollovers out of retirement plans into individual retirement accounts.

Such was the conclusion reached by a panel of legal experts Sunday afternoon at the National Association of Plan Advisors' annual 401(k) Summit in New Orleans.

Panelist C. Frederick Reish, a partner at Drinker Biddle & Reath, referred to distributions out of retirement plans and IRA rollovers as “the top issue for 2014.”

“Because of the amount of money that's moving from 401(k)s to IRAs, regulators worry about conflicts of interest, higher retail prices and the impact on the sustainability of lifetime income,” Mr. Reish said.

(Related: A warning on multiple IRA rollovers)

Though the Labor Department in the past issued an advisory opinion on rollover capture, the impression in the industry was that it didn't impose much of a burden on non-fiduciary advisers to retirement plans. In fact, it's acceptable for non-fiduciary brokers working with retirement plans to receive rollover business if they can demonstrate that they are not using their authority to solicit workers for rollover business. Rather, they can educate the employees, and the workers can seek these advisers for rollover help on their own.

But the Securities and Exchange Commission and Finra have both recently signaled that they are very interested in how brokers handle their rollover business. The Financial Industry Regulatory Authority Inc. went so far as to issue Regulatory Notice 13-45 last December, highlighting the fact that broker-dealers and registered reps must bear in mind the suitability of their recommendations when they guide clients on how to proceed with a potential rollover.

Mr. Reish warned that it's one thing if brokers are providing education on rollovers, describing the advantages and disadvantages of distributions out of a retirement plan. But these non-fiduciary brokers ought to maintain a checklist of the items they discuss with plan participants, and keep written disclosures.

“Think a little in terms of 408(b)(2) type disclosures of fees and services, [fiduciary] status,” said Mr. Reish, referring to a fee disclosure regulation from the Labor Department that went into effect in 2012 and that spells out fee disclosures service providers must share with plan sponsors.

Marcia Wagner, president of The Wagner Law Group and a panelist Sunday, suggested using the Finra notice as a road map of what broker-dealers and reps should incorporate into their best practices. It's a checklist of what Finra will audit, she said.

“Use it as a training manual for your reps with respect to conflicts of interest,” Ms. Wagner said. “You need to have model disclosures and disclaimers. Use this Finra guidance as a checklist to do so.”

What we're experiencing right now with respect to regulators' heightened focus on IRA rollovers is, in some sense, a natural progression. “It's a metaphysical law of nature: Pendulums swing,” Ms. Wagner said. “Rollovers were the Wild West for a long time, and now it's swinging in the other direction where it's too much and all the agencies want a piece of the pie.”


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