Rollover Recommendations

Art by Tim Bower

QUESTION: I provide investment advice to ERISA [Employee Retirement Income Security Act] plan committees, plan participants and IRAs [individual retirement accounts]. As the DOL [Department of Labor] did not contest the 5th Circuit decision and the department’s fiduciary rule was vacated on May 7, what issues will I now need to consider in recommending plan rollovers?

ANSWER: Under the old fiduciary rules, which now apply again, some rollover recommendations may still be fiduciary acts resulting in a prohibited transaction. And, because the new rule’s best interest contract exemption (BICE) no longer applies, there is currently no exemption to provide relief. However, there are some solutions you can consider.

Because the new fiduciary rule was vacated, or thrown out, by the 5th Circuit Court of Appeals, the old fiduciary rules, as we noted above, apply once again. Under those rules, and based upon DOL guidance issued in 2005 (DOL Advisory Opinion 2005-23A), the determination of whether a recommendation to a participant to take a distribution and roll it over to an IRA is a fiduciary act depends on whether the adviser is already a fiduciary to the plan.

The adviser is a plan fiduciary if a five-part test is satisfied, that is: 1) He provides advice to the plan about investments for a fee or other compensation; 2) He does this on a regular basis; 3) The exchange is pursuant to a mutual understanding; 4) The understanding allows that the advice would form a primary basis for the plan’s decisions; and 5) The advice is individualized based on the plan’s particular needs.

If the adviser is not a fiduciary to the plan under this five-part test and he recommends a rollover to a plan participant, then the rollover recommendation is not a fiduciary act. As a result, the recommendation is not subject to ERISA’s duty of loyalty or the prudent man standard of conduct. Therefore, the recommendation does not result in a prohibited transaction.

On the other hand, if the adviser is a fiduciary to the plan under the five-part test, the recommendation to roll money over is a fiduciary act subject to ERISA’s duty of loyalty and prudent man standard of care. Additionally, if it causes the adviser to receive additional compensation that he would not have absent the recommendation—i.e., the IRA advisory fee—the fiduciary is committing a prohibited transaction. Unfortunately, there is no prohibited transaction exemption (PTE) under the old rules, and the 5th Circuit’s decision vacates the entire DOL fiduciary package, including the BICE, which would have provided relief. 

How should you handle rollover recommendations under these circumstances?

One solution would be to avoid recommending rollovers and, instead, provide the participant with objective information and education about his options—i.e., keep the money in the plan, roll it over, transfer it to another employer plan if he is changing employment and the plan allows it, or take a distribution. This may be difficult to do, especially if the participant is looking to you for guidance as to the best course of action.

Another possibility would be to avoid becoming a fiduciary to the plan under the five-part test. E.g,, instead of supplying investment advice to the plan, you could provide education services to the plan sponsor. This would not cause you to be a fiduciary. Or, if you do provide investment advice to the plan, you could try to avoid giving it on a regular basis. However, that would be difficult if you were already meeting with the plan sponsor at least once a year.

Clearly, none of these solutions is perfect. Fortunately, it is likely the DOL will introduce a new fiduciary rule and exemptions. And it’s possible the relief could be retroactive—if the adviser has engaged in a disciplined best interest process when developing the rollover recommendation.
Postscript: On April 18, the Securities and Exchange Commission (SEC) issued a proposed “regulation best interest” and a proposed interpretation of the standard of care for registered investment advisers (RIAs). Both proposals impose a best interest standard of care on rollover recommendations.

Fred Reish is chair of the financial services ERISA practice at law firm Drinker Biddle & Reath LLP. A nationally recognized expert in employee benefits law, Reish has written four books and many articles on ERISA, pension plan disputes, and audits by the Internal Revenue Service and Department of Labor. Joan Neri is counsel in the firm’s financial services ERISA practice, where she focuses on all aspects of ERISA compliance affecting registered investment advisers and other plan service providers.