When the Labor Department proposed its fiduciary rule last year, stakeholders identified rollovers as one area that could be thrown into upheaval.
It's easy to see why — in the rule's current iteration, the act of recommending that a retirement plan participant roll 401(k) assets to an individual retirement account would, for the first time, be universally beholden to a fiduciary standard.
The Department of Labor's intent is to put all brokers and advisers on a level playing field with respect to retirement investment advice. Current rules let brokers operate under a less-stringent “suitability” standard.
However, the proposed rule would allow brokers to “retain the upper hand” with respect to rollovers when compared to some fiduciary 401(k) advisers, according to Brian Graff, chief executive of the American Retirement Association, a trade group representing plan advisers and other stakeholders in the retirement industry.
Here's why: Fee-based, fiduciary 401(k) advisers would be prohibited from recommending rollovers to plan participants if assets were going into a fee-based, discretionary IRA, whose fees were higher than the 401(k) fees, Mr. Graff said.
The key here is discretionary management in the IRA. It's a service brokers don't often offer, but it's commonplace for retirement specialists to exercise discretion in both accounts, according to Mr. Graff.
“This [DOL] rule is intended to try to tamp down on traditional brokers, and
have them move to a more fee-based model. It's ironic that, in the case of rollovers, brokers have an advantage over advisers who are fee-based,” Mr. Graff said.
“It's putting fee-based advisers with discretionary authority over clients' accounts at a huge disadvantage,” Mr. Graff added. “It's not a disadvantage, it's a prohibition.”
DOL spokesman Michael Trupo wasn't able to offer comment by press time.
A BIG POT
At stake is a big pot of rollover assets. New money from IRA rollovers
contributed $377 billion to overall IRA assets in 2014, according to research firm Cerulli Associates. Cerulli projects the rollover figure to hit $412.5 billion in 2015, and $516.9 billion by 2020. (Any effects from the DOL rule weren't factored into these projections.)
IRAs
hold $7.4 trillion in assets, compared to the $6.8 trillion in defined contribution plans, according to the Investment Company Institute. Half of IRA owners cite “a financial professional” as the primary consultative source on the rollover decision.
WHY THE 'DISADVANTAGE'?
The disadvantage Mr. Graff referred to exists under current rules, too, though to a seemingly lesser degree. Today, if a fiduciary 401(k) adviser were to advise a participant to roll money to an IRA, and the adviser would make higher compensation in the IRA (which is often the case), it's potentially a prohibited transaction under ERISA, according to Blaine Aikin, chairman of fi360 Inc., a firm that provides fiduciary training. (Non-fiduciaries such as brokers don't have the same concern.)
But it's not a black-and-white matter — many view the possibility of triggering a prohibited transaction as too risky and steer clear, but a prohibited transaction determination is heavily based on “facts-and-circumstances” and the activity does still occur, Mr. Aikin said. Mr. Graff says this sort of rollover recommendation happens often, because a 401(k) adviser is often the only adviser a participant knows.
Under the Labor Department's proposed rule, though, it is definitely a prohibited transaction, Mr. Graff said, because it doesn't qualify for the
Best Interest Contract Exemption (BICE).
The BICE is a feature of the rule which provides exemptions for otherwise prohibited actions, such as receipt of variable compensation. The belief is earning higher compensation in an IRA over a 401(k) would qualify for this exemption.
However, the BICE doesn't cover discretionary advice — it only applies to non-discretionary advice, whereby a client chooses to implement a recommendation, according to Bruce Ashton, a partner in law firm Drinker Biddle & Reath's employee benefits and executive compensation practice group. This is what creates the wrinkle in question for 401(k) fiduciary advisers.
Of course, as under current rules, level fees between 401(k) and IRA — getting 25 basis points for advisory services in both accounts, for example — would be OK. But IRA service is often more expensive, due to the personalized nature of the advice, and levelization is difficult to achieve, according to Jason Roberts, chief executive of the Pension Resource Institute.
“There's a tremendous amount of value that can be delivered in the IRA, particularly the advisory IRA, and we just don't see that level of personalized touches in-plan,” Mr. Roberts said.
UNINTENDED CONSEQUENCE
“I'm hoping they see this as merely an unintended consequence of the proposal and are going to fix it,” Mr. Graff said.
It is unlikely the DOL meant for discretionary advisers — who by definition are already fiduciaries — to be ill-affected by the regulation, so this sort of issue is “ripe for clarification” in a final rule, Mr. Aikin said. The final rule is widely expected to drop in the coming weeks.
“It'd seem to be an anomaly to do away with a fiduciary role that currently exists by way of something like not being explicit in the BIC exemption,” Mr. Aikin said.
And, if there is no clarification, Mr. Ashton believes there's a potential workaround.
“If the 401(k) specialist adviser provides education on the distribution alternatives and the participant elects a rollover, I believe the adviser can then 'sell' his discretionary advice service in the IRA to the participant without it being a PT [prohibited transaction] and without having to worry about the BICE,” he said.
