DOL fiduciary rule death leaves 401(k) advisers in legal ‘grey area’ with rollovers

It’s no secret that the broad financial industry despised the Department of Labor fiduciary rule. The regulation, which lived a short while before dying in court, upended the status quo with respect to retirement savers, cracking down on brokers’ conduct and firms’ practices and oversight of their financial advisers.

But the rule was helpful for the industry in some respects. It provided a clear pathway for financial advisers to engage in certain activities that regulators previously frowned upon — or at best considered hazy. Advice on rollovers from 401(k) plans is one of those hazy areas, and the demise of the DOL rule has thrust the issue to center stage.

The American Retirement Association, a trade group representing all sorts of stakeholders in the retirement industry, including 401(k) plan advisers, highlighted the problem this week in a letter to Preston Rutledge, the assistant secretary of labor for the Employee Benefits Security Administration.

The association, which houses the National Association of Plan Advisors, argues that financial advisers serving as fiduciaries to 401(k) plans are now in a “legal gray area” if they provide rollover recommendations to participants. The group is seeking intervention from the Labor Department to address the issue.

The problem stems from guidance the DOL issued in an advisory opinion years before the DOL fiduciary rule. That guidance — Advisory Opinion 2005-23A — says most rollover recommendations aren’t fiduciary advice under the Employee Retirement Income Security Act of 1974. However, an adviser who serves as a fiduciary to a 401(k) plan and also advises a participant in that plan to roll money into an IRA he or she provides “may be” breaking prohibited-transaction rules.

In other words, the guidance prohibits fiduciary advisers from discussing the “advisability” of rolling money over to themselves. They may discuss the general “availability” of rollovers, according to Marcia Wagner, principal at The Wagner Law Group.

For example, let’s say a fiduciary adviser gets paid 50 basis points on assets in a 401(k) plan, but gets more compensation — maybe 100 basis points — by soliciting a participant rollover to an IRA. The adviser will have used his or her fiduciary position to make more money, thereby engaging in a prohibited transaction, which subjects the adviser to steep excise-tax penalties.

The DOL rule, via a mechanism called the best-interest contract exemption, allowed fiduciary 401(k) advisers to engage in these sorts of transactions. Now that the rule has vanished, advisers are in limbo again.

“People hated [the BICE] and there were some difficulties to it, but if you stood up and said you were a fiduciary, rollovers were very easy, frankly,” Ms. Wagner said. “Now we’re back to the old days. These financial advisers who are fiduciaries to plans are in the unenviable position they were in before.”

Not only must fiduciary advisers tiptoe around the rollover issue again, but they are on an uneven playing field with brokers, who, as nonfiduciaries to 401(k) plans, aren’t ensnared by these same rules.

And, whereas an adviser may have escaped scrutiny years ago, the publicity around rollovers as a result of the fiduciary rule will make that much more difficult going forward, according to legal experts.

The DOL regulation may be dead, but it’s still causing plenty of headaches for the financial industry.