ERISA vista | PLANADVISER November/December 2015

Advice as a Fiduciary

Questions advisers are asking

By Fred Reish and Joan Neri | November/December 2015
PLANADVISER-2015-ERISA-June-KimArt by June KimADVISER QUESTION: I am an independent registered investment adviser [RIA] who provides financial planning and wealth management services to individuals. I do not provide advisory services to Employee Retirement Income Security Act [ERISA] plans. However, some of my clients ask me about plan distributions and individual retirement account [IRA] rollovers and investments. Does the Department of Labor [DOL]’s proposed redefinition of fiduciary investment advice affect me?

ANSWER: The proposal could affect you. Under the proposal, you would be a fiduciary if you make an “investment recommendation” for a fee. And, depending on the circumstances, this could cause you to engage in a prohibited transaction (PT).

The DOL’s fiduciary proposal would make recommending that a participant take a plan or IRA distribution, or recommending how to invest those assets, a fiduciary act. This is a significant departure from the department’s current position under a 2005 advisory opinion (2005-23A). There, the DOL said distribution and rollover recommendations would not be fiduciary advice if the person making the recommendation was not already a fiduciary to the plan.

That said, under the proposal, even though you are not a fiduciary to a plan, if you recommend that a participant take a distribution or rollover, and you receive a direct or indirect compensation, you will be a fiduciary for that purpose. As a result, your recommendation should be prudent and in the best interest of the participant. Also, you would need to make sure that you don’t engage in a PT. The PT rules concerning recommendations to participants in ERISA-governed plans are in both ERISA and the Internal Revenue Code (IRC). The PT rules for advice to IRA owners are in only the IRC. Both the IRC and ERISA use the same definition of fiduciary in applying these rules.

The PT that could be an issue is the “self-dealing” prohibition, which says you cannot use your fiduciary advice to cause yourself to make additional compensation. An action viewed as self-dealing would be if you recommend that a participant take a distribution and roll it over to an IRA and you charge a fee in that IRA. This is a conflict of interest—and a PT—because if you don’t receive a fee from the plan, meaning your current plan fee is zero, anything you make from the IRA will be more than you would earn if the participant left the money in the plan.

But let’s suppose you do receive a fee from the plan—e.g., you provide investment services to a participant through a self-directed brokerage account (SDBA). The fee charged in the SDBA will be compared with the IRA fee, and if the IRA fee is greater, you will have engaged in a PT; if the fee is the same in the 401(k), SDBA and the IRA, there wouldn’t be a PT. Committing a PT is costly because you would be required to pay back the prohibited compensation, plus the lost earnings. In addition, there are penalties.

There are ways to avert this result, but they may not be easy.

If you already receive compensation from the plan through managing a participant’s account, you could “levelize” your compensation. In other words, you could charge the same amount in the IRA and avoid a PT. Or, if you are charging a flat dollar amount to the individual—e.g., for financial planning—and the dollar amount doesn’t change if the money is moved from the plan to an IRA, there wouldn’t be a PT.

Another way to avoid a PT would be to make no distribution “recommendations.” The preamble to the re-proposal acknowledges that providing the participant with “information about plan or IRA distribution options, including the consequences associated with the available types of benefit distributions” is not a fiduciary act. Based upon this, it would not be a fiduciary act if you provided your client with an unbiased, educational description of his distribution choices, including rollover to an IRA, and of the points he should consider to make the best choice given his circumstances.

Fred Reish is chair of the Financial Services ERISA practice at the law firm Dirnker, Biddle & Reath. A nationally recognized expert in employee benefits law, Reish has written four books and many articles on the Employee Retirement Income Security Act (ERISA), Internal Revenue Service (IRS) and Department of Labor (DOL) audits, as well as pension plan disputes. Joan Neri, who has been associated with the firm since 1988, is counsel on the Employee Benefits and Executive Compensation Practice Group. Her practice focuses on all aspects of employee benefits counseling.