ADVISER QUESTION: Does the DOL [Department of Labor]
fiduciary rule apply when I recommend that an IRA [individual
retirement account] owner transfer his IRA account to one that I
ANSWER: Yes. Any recommendation that an IRA owner
transfer his IRA to one you advise is fiduciary advice and
will require a thoughtful, thorough and well-documented
fiduciary process along with an exemption from the prohibited transaction rules.
Under the DOL fiduciary rule, it is a fiduciary act to
recommend rollovers and transfers from an existing
retirement account, including an IRA, to an IRA you advise.
And, because the fiduciary advice results in compensation
you would not have received absent the recommendation—
namely, the advisory fee—it is a prohibited transaction.
However, you will still be able to provide the advice and
keep the fee if you satisfy a prohibited transaction exemption (PTE) known as the best interest contract exemption
During the transition period, this June 9 through
December 31—or possibly beyond that if the transition
period is extended—only three conditions of the BIC need
to be satisfied. They are referred to as the impartial conduct
standards and require that:
• The advice be in the IRA owner’s “best interest”—a stan-
dard that mirrors the Employee Retirement Income Security
Act (ERISA) prudent man standard and the duty of loyalty;
• The compensation does not exceed a reasonable amount,
which requires a comparison, or benchmarking, of your fees
with the fees of other advisers who provide comparable
• Statements to the IRA owner about material conflicts of
interest, fees and other relevant matters must not be mate-
Let’s focus on the best interest standard and what that
means in the context of recommending a transfer of an IRA.
To satisfy this standard, you need to examine the relevant factors concerning the possible transfer and evaluate them in light of the investment objectives, financial
circumstances and needs of the IRA owner. For an IRA-to-IRA transfer, the relevant factors would include, at
the least, the investments, services and expenses in the
current IRA as compared with those available in the IRA
that you propose. In other words, you need to obtain that
information about the current IRA and compare that with
the prospective one. If the investments and services are
comparable, but your fees are less expensive, then that
Fred Reish is chair of the financial services ERISA practice at the
law firm Drinker, Biddle & Reath LLP. 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, and
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.
How the fiduciary rule impacts them
difference may justify a best interest recommendation to
Or instead, let’s suppose the investments and expenses
in both IRAs are similar, but the services differ. In that
instance, your focus should be on identifying the services
that best align with the IRA owner’s investment objectives,
risk tolerance, time horizons, and financial needs and
circumstances. For example, if you provide services not
offered under the existing IRA—such as investment strategies that support sustainable retirement income withdrawals for the investor’s lifetime—then those services
may justify a recommendation to transfer the IRA under
the best interest standard.
This process should be documented, so that you will be
able to prove that your recommendation was in the IRA
owner’s best interest. The documents should include the
information gathered about the existing IRA—i.e., investments, fees and services—the IRA you advise, and a profile,
questionnaire or other “know your customer” form that
can serve as the basis for establishing that the recommendation aligns with the IRA owner’s best interest.
Fortunately, the DOL has announced a nonenforcement
policy saying it will not penalize those who are “working
diligently and in good faith” to comply with the fiduciary
rule during the transition period. And the Internal Revenue
Service (IRS) has said it will also abide by this nonenforcement policy.
However, the policy does not apply with the Securities
and Exchange Commission (SEC), FINRA and private claimants. For this reason, the documents should be retained in
a retrievable format as protection against a private claim
by the IRA owner or in the event of an SEC or FINRA examination.
Compliance with the best interest standard requires a
process that is thorough, thoughtful and well-documented.
You should examine your current business practices to
determine what additional procedures you may need to
follow in order to satisfy this fiduciary standard.