How 401(k) plan advisers win under the final DOL fiduciary rule

Retirement plan advisers have an easier path to advising on rollovers and working with small 401(k) plans

Apr 7, 2016 @ 2:02 pm

By Greg Iacurci

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401(k) advisers won significant concessions from the Labor Department in the final draft of its fiduciary rule, ranging from relief on rollovers and education to the easing of restrictions on advisers operating in the small-plan market.

The Department of Labor released its landmark regulation yesterday, which will make fiduciaries of anyone providing investment advice to retirement accounts such as 401(k) plans and individual retirement accounts.

Rollovers had been a sticking point under rules proposed by the DOL last year. Under the proposed rules, if a fee-based 401(k) adviser wanted to do a rollover with a plan participant into an IRA charging a higher fee, that adviser would have needed to enter into the enhanced compliance framework of the Best Interest Contract Exemption (BICE) portion of the rule.

Many felt this was an unnecessary burden, because providing advice on an individual account is typically more personalized, and hence more expensive, so it would be natural for IRA fees to be higher.

Further, the proposal would have essentially prohibited fee-based 401(k) advisers from doing rollovers at all if assets were being rolled into a discretionary, fee-based IRA, because the BICE didn't extend to discretionary advice.

However, such red tape doesn't exist under the DOL's final rule, which granted an exemption from BICE compliance for “level-to-level compensation.”

“The rollover thing is huge,” said Brian Graff, chief executive of the American Retirement Association, a trade group representing plan advisers and other stakeholders in the retirement industry. “[The proposal] was essentially a significant restriction on 401(k) advisers to work with participants on rollovers. So this is a game-changer.”

The change is significant for 401(k) advisers, because many assist plan participants with rollovers — sometimes, the 401(k) adviser is the only adviser a participant knows, Mr. Graff said.

Sean Deviney, who runs the retirement plan department at Provenance Wealth Advisors, said working with participants is a “natural extension” of his business.

“For us, the biggest win out of [the rule] was having the level-to-level compensation exemption,” Mr. Deviney said. “It allows those advisers to continue in those rollover relationships when it's appropriate.”

Of course, rolling over still must be in the participant's best interest and the adviser must be able to justify a higher IRA fee, Mr. Deviney said. For example, if a 401(k) plan's investment options aren't in line with the retirement income needs of a participant or if a participant requires a detailed retirement income planning strategy, that higher fee may be justified, he added.

Marcia Wagner, principal at The Wagner Law Group, suggests advisers document why the rollover is in a client's best interest and how an adviser's compensation could be considered “reasonable” for the services rendered.

The DOL proposal also would have prevented brokers from working with small, self-directed DC plans, defined as a plan with fewer than 100 participants, Ms. Wagner said. Basically, that's because the BICE wasn't available to brokers receiving variable compensation such as commissions and 12b-1 fees in that small DC marketplace.

“We thought that was very restrictive and could potentially shut off distribution of small plans,” Mr. Graff said.

Now, however, brokers who'd like to receive forms of variable compensation in the small-plan market can use the BICE to do so.

Although that is a win for brokers on the surface, it raises the need for some additional scrutiny on the part of these brokers. If a plan's participant count were to creep over 100, the BICE would no longer apply, and if a broker continued receiving forms of variable compensation it would be considered a prohibited transaction, Ms. Wagner said.

Such a designation would come with hefty costs attached — up to 135%, plus interest, of the assets involved in the transaction (which, in this case, would be plan assets).

“This is a cut-and-dry prohibited transaction, not a facts-and-circumstances one you can argue,” Ms. Wagner said.

“I don't think the financial adviser, broker-dealer and wirehouse communities have really realized that prohibited transactions are going to be part of their world. These guys have never really had to deal with it. Now, the easiest prohibited transaction in the world is non-compliance with the BICE,” she added.

The message: Brokers have to make a habit of counting participants to ensure they're in compliance and not over the 100-participant demarcation line. That might not be so easy, either, because companies grow and acquire other companies, which could lead to a larger retirement plan. Participant count isn't restricted to active participants, either — the government's definition also includes anyone with an account balance (including former employees) and anyone eligible to participate in the plan.

It's also a little easier for advisers to provide education without triggering a fiduciary activity under final rules, according to Mr. Graff. Proposed rules prohibited advisers from being able to identify specific funds on the investment menu as examples of what would work well within certain model portfolios — for example, what constitutes conservative and aggressive portfolios — without being a fiduciary.

“That would have had a chilling effect on the willingness of advisers to provide that education,” Mr. Graff said.

Now, however, advisers can identify specific funds, as long as they didn't have an incentive to recommend such a fund, Mr. Graff said.

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