How to clarify the murky regulations governing IRA rollovers

July 21 marks the deadline for comments on the Department of Labor’s proposed fiduciary rule. The DOL has indicated that it will be responsive to suggested rule changes that reduce regulatory burdens or provide practical advantages, so long as investors’ best interests are served and core fiduciary principles are not compromised.
For RIAs, the change that would best fit this bill is for the rule to more clearly distinguish the special obligations attendant to advice on rollovers versus advice that involves ongoing conflicts of interest associated with variable compensation.
As proposed, the rule conflates these two issues by attempting to address them both under the proposed “Best Interest Contract Exemption” (BICE). Differentiating the two would not only make the rule clearer and more practical, it would also settle currently murky regulations governing rollover advice.
(Related read: Best practices for retirement plan rollovers)
At present, an adviser who is a co-fiduciary to a retirement plan is at risk of committing a prohibited transaction if they actively participate in a plan participant’s decision to roll out of the plan to an IRA for which the adviser would be retained to provide advice. While some legal and compliance professionals maintain that such situations can be carefully managed to avoid running afoul of DOL’s prohibited transaction rules, others have recommended that advisers steer clear of accepting rollover business from participants in plans for which they are co-fiduciaries.
This is especially true for large firms where oversight of a tricky and highly case-specific regulatory matter is made all the more challenging by the number of nuanced situations that can arise. This is unfortunate because it is generally the case that both the client and the adviser would prefer to continue the relationship after the rollover occurs.
The primary regulatory concern is that an adviser to a plan is in a position of considerable influence over the participants. There is a conflict of interest involved in these rollover situations if the adviser receives higher compensation for servicing the IRA assets than would be the case if the assets remain in the plan.
DOL invented BICE not to correct this rollover problem for fiduciary advisers, but in response to brokerage and insurance industry arguments that the rule should be “business model neutral” and that commissions and other forms of variable compensation do not necessarily mean that a client’s best interest will not be served.
BICE would, among other things, allow an adviser to recommend a rollover and provide ongoing advice to an IRA account-holder even if the adviser receives commissions and other payments from third parties. However, BICE comes with substantial strings attached. Among them are the need for the adviser to enter into a contract with the client acknowledging fiduciary status, warranting that the adviser has implemented policies and procedures to mitigate conflicts of interest and serve the investor’s best interests, and providing cost, compensation and conflicts disclosures on an ongoing basis.
(More: How the DOL’s fiduciary rule affects retirement plan advisers’ ability to land new business)
For advisers who are willing to serve as fiduciaries to IRA account-holders without receiving variable compensation or payments from third parties, it isn’t necessary to demonstrate conformity to special obligations imposed by BICE that are specifically intended to address the conflict of interest associated with ongoing compensation conflicts. Once the rollover dollars are in the IRA, level compensation means there are no ongoing prohibited transactions. Without prohibited transactions, there is no need for an exemption.
The rollover decision is a one-time event and the DOL should craft an exemption designed to handle the point-in-time situation when a fiduciary retirement adviser to a plan is called upon to assist a plan participant with a rollover decision.
Specifically, the exemption should address the circumstance where the fiduciary retirement plan adviser provides participant-level rollover advice and also offers to provide ongoing, level-fee advice to any participant who decides to roll their plan assets to an IRA, albeit at a compensation level that is higher than the adviser would earn if the assets were retained in the plan.
Conceptually, this limited rollover advice exemption would be BICE-like in that it would require confirmation of fiduciary accountability, policies and procedures to assure impartial assessment of all of the options available to the participant, and thorough disclosure of the costs and conflict involved if the adviser is chosen to provide advice on the IRA assets (i.e. higher compensation for the adviser once the assets are in the IRA).
However, the circumstance involved is much more straightforward than one involving ongoing third-party payments and variable compensation. Moreover, while the rollover advice is being rendered, the assets remain in the plan. The DOL maintains direct regulatory oversight authority over plan assets. Therefore, no special contract would seem to be required to ensure recourse for a fiduciary breach related to the rollover advice.
Labor Secretary Thomas Perez has indicated that the DOL plans to refine the rule based upon comments received, and that some changes are already in the works. Hopefully clarifying this distinction is on their short list.
Blaine F. Aikin is president and chief executive of fi360 Inc.