Legal Eagles Advise on IRA Rollovers from 401(k)s

LAS VEGAS—The Department of Labor (DOL) deems an adviser-guided rollover from a retirement plan into an individual retirement account (IRA) a prohibited transaction if the adviser is a fiduciary. However, it is possible for a plan adviser to guide a rollover—with care.

This was the message from speakers at the National Association of Plan Advisors/American Association of Pension Professionals and Actuaries’ (NAPA/ASPPA) 401(k) Summit session here Monday, “How You Can Accept Rollover Business From a 401(k) Plan.”

The crux of the problem lies within the DOL’s rules that a plan fiduciary could possibly fail to meet their responsibilities to the plan and its participants by steering a participant’s assets into higher-paying funds or investments, said Marcia S. Wagner, managing director of the Wagner Law Group. Guidance and interpretations from the DOL, not to mention court rulings, make it clear that the DOL holds retirement plan advisers up to its fiduciary standards whether they are an outright 3(21) or 3(28) fiduciary or not.

“The Department’s concern is the ability to exploit trust and the potential for abuse,” Wagner said. “ERISA [the Employee Retirement Income Security Act] strictly restricts rollovers offered by advisers. A fiduciary cannot take any actions to increase compensation and steer investors to funds with the highest 12b-1 revenue-sharing fee, for example. DOL also suggests that if an adviser to a fiduciary, any rollover [they oversee] may trigger a prohibitive transaction, subject to all applicable excise taxes.”

These standards hold true for virtually all retirement plan advisers, Wagner said. “Even if you aren’t a fiduciary [to the plan], any interaction you have with clientele could be perceived by DOL as a fiduciary action—and you are an accidental fiduciary,” she said.

“Therefore, everyone in this room is subject to prohibitive transactions,” added Charles D. Epstein, principal of retirement plan consultancy The 401k Coach.

(Cont’d…)

However, there is a way to “thread the needle of retirement plan rollovers,” steeped in an advisory opinion that DOL issued was on a 1996 Supreme Court case, Varity Corp. v. Howe, Wagner said. The court ruled that the same individual may act in both fiduciary and non-fiduciary capabilities, Wagner said. “You can differentiate your fiduciary and non-fiduciary services in your service agreement,” or require both the plan sponsor and participant to sign an acknowledge agreement that a rollover that you recommend is separate and unrelated from the plan services, she continued.

Plan advisers can, therefore, confidently handle rollovers by meeting a three-part test established by the Varity case, Wagner said, “to make sure you fail each criterion and establish you are not a fiduciary.” These are:

• Set the proper factual context: Handle the rollover in a setting outside the plan sponsor’s offices; i.e., the adviser’s offices. Do not promote rollover IRA services at plan meetings; only at one-on-one meetings.
• Obtain plan authority: Expressly state in your service agreement that IRA rollover services are independent of the plan services and/or obtain a signed, written confirmation letter from the plan sponsor confirming that your rollover services are unrelated to plan services.
• Make it clear to participants: Request a signed, written acknowledgement from participants explaining that rollover IRA services are not a plan fiduciary service.

At plan meetings, remember, Epstein added, “You can talk about the availability of rollovers, but not the advisability. Do not indicate rollover IRA services are part of plan services.”

Likewise, if a plan participant has assets in previous 401(k) plans or IRAs, a plan adviser can roll those over into the existing plan’s 401(k) without any issue—but clearly state both the pros and the cons of consolidating assets, Wagner said. If they want to roll any current or preexisting assets into an IRA, the adviser must conduct those transactions off site, in one-on-one meetings, independent of the plan, Wagner said.