ADVISER QUESTION: How does the delay of the DOL [Department of Labor] fiduciary rule affect my responsibilities when I
recommend that participants take distributions from an ERISA
[Employee Retirement Income Security Act] plan and roll them over
to an IRA [individual retirement account] that I will advise?
ANSWER: The provision in the DOL fiduciary rule that says
distribution and rollover recommendations are fiduciary
advice was not changed; it was only delayed from April 10
to June 9. Therefore, any rollover recommendation on or
after June 9 will be deemed fiduciary advice and will require
a prudent process and an exemption from the prohibited
On and after June 9, you will engage in a fiduciary act
under ERISA when you recommend that an ERISA plan
participant take a distribution and roll it over to an IRA. This
means you will need to adhere to ERISA’s prudent man standard and duty of loyalty.
To do that, you will need to consider all relevant factors,
including the investments available under the existing plan
and the proposed IRA, the different levels of services, and
the fees and expenses associated with both savings vehicles, including whether the employer pays for some of the
plan’s expenses. You need to evaluate those relevant factors
to determine whether recommending the rollover is appropriate based on the participant’s needs and circumstances.
In addition to satisfying the ERISA standard of conduct,
you need to consider the prohibited transaction rules. Under
these rules, if you receive compensation that you would not
have absent the recommendation—here, the IRA advisory
fee—you will be committing a prohibited transaction. In
order to receive this prohibited compensation, you need to
use an exemption. The exemption you will most likely use is
the best interest contract (BIC) exemption.
The good news is that most of the difficult conditions of
the BIC exemption are delayed until January 1, 2018; these
include the disclosure requirements, representations of fiduciary compliance, and warranties about firm policies and
procedures. The only requirement that must be met from
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 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.
Rollovers to IRAs
How the fiduciary rule delay affects these
June 9 through December 31 is compliance with the rule’s
impartial conduct standards (ICS).
The ICS has three parts: You may not be paid any more
than reasonable compensation; you may not make any
materially misleading statements; and you must satisfy the
best interest standard of care, which is virtually identical to
ERISA’s prudent man standard of conduct and duty of loyalty.
Both the best interest and prudent man standards require
that you make diligent and prudent efforts to obtain information about the existing ERISA plan. If you are a fiduciary
adviser to the participants’ plan, you will have the relevant
information. On the other hand, if you are not the plan’s
adviser, you need to obtain the relevant information from
The participant disclosure statement—i.e., the 404a- 5
disclosure—is an important document for this purpose. It
has information about the plan’s designated investment
options, including expense ratios and performance history.
Also, quarterly participant statements show how each
participant is invested and whether any fees or expenses
have been charged against his account.
There may be instances, however, where the participant
is unwilling to provide information or where you are otherwise unable to obtain information you need. In its frequently
asked questions issued under the DOL fiduciary rule (FAQ
14), the department indicated that, in such instances, you
may rely on alternative data sources—e.g., the most recent
annual return (Form 5500) or reliable benchmarks on typical
fees and expenses for the type and size of plan—as long as:
1) prudent efforts were first undertaken to obtain the plan
information, and 2) the data source’s limitations are properly
disclosed in writing.
Even though documenting your actions is not required, it
is a good practice to do so because it proves that a prudent and
best interest process was used to make the rollover recommendation. For advisers who currently provide ERISA fiduciary services, this process will be familiar, but for advisers
unfamiliar with these concepts, it will probably be necessary
to modify their current procedures.
Any rollover recommendation …
will be deemed fiduciary advice
and will require a prudent