QUESTION: I am an independent registered investment adviser
[RIA] who provides discretionary investment management
services to individual retirement accounts [IRAs] and charges
an asset-based fee. Occasionally, I recommend that a plan
participant roll over a plan distribution to an IRA that I manage.
How does the Department of Labor [DOL] fiduciary rule affect
ANSWER: The DOL fiduciary rule does not
impact the ongoing discretionary investment management services provided to the
IRA. Those are fiduciary services under the
Internal Revenue Code (IRC), are not subject
to a DOL fiduciary standard of conduct, and
do not constitute a prohibited transaction
(PT), because you charge a level fee. On
the other hand, the rollover recommendation is a fiduciary act under the DOL rules
and is subject to the Employee Retirement
Income Security Act (ERISA) standard of
conduct. Also, in most instances, the rollover recommendation will result in a PT
for which an exemption such as the best interest contract
exemption (BICE) is needed.
The IRC and ERISA have the same definition of fiduciary investment advice. The only difference is that ERISA
imposes a standard of care on fiduciaries—i.e., the prudent
man standard and the duty of loyalty—and the IRC does not.
Regulations under both ERISA and the IRC say that a
person is a fiduciary when he has discretion to manage
plan or IRA assets. The new DOL fiduciary rule does not
change that definition. As a result, you have been—and will
continue to be—a fiduciary under the IRC when providing
discretionary investment management services to IRA
accounts. Note that only the IRC, not ERISA, applies to
giving fiduciary advice to IRAs.
Also, if you charge only a reasonable level fee, and if
you are “independent”—i.e., no related parties or affiliates
receive compensation as a result of your investment decisions—then your discretionary investment management
services will not result in a PT. By level fee, we mean a fee
that does not vary based upon your investment decisions.
There is another definition of fiduciary under the IRC and
ERISA that says a person is a fiduciary when he provides
investment advice for a fee. The new DOL fiduciary regulation significantly expands the activities that constitute fiduciary advice. The DOL’s expanded definition includes recommendations to a plan participant to take a distribution from
Fred Reish is chair of the financial services Employee Retirement Income
Security Act (ERISA) practice at the law firm of 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.
Advisers need to charge a level fee
a plan and roll it over to an IRA.
Under this definition, when you recommend that a
participant take a distribution and roll it into an IRA you
manage, you are acting as a nondiscretionary fiduciary
adviser for this purpose under ERISA because you are
providing advice about ERISA plan assets for a fee—i.e., the
IRA management fee to be paid from the
rolled-over assets. This means you will
need to adhere to ERISA’s prudent man
standard and duty of loyalty. To do that,
you need to compare the services, fees and
expenses of the plan with those of the IRA
and determine whether recommending the
rollover is appropriate based on the participant’s needs and circumstances.
Also, as you will be receiving compensation—the IRA management fee on the
rolled over assets—you will be committing a P T for which an exemption is needed.
The best interest contract exemption (BICE)
would be unavailable if you had control—
i.e., discretion—over the rollover decision. But, under your facts, that is not the case because the
participant makes the decision to accept or reject your rollover recommendation. As a result, you can use the BICE as
an exception to the PT. The DOL confirmed this in its first
set of frequently asked questions (FAQ). To satisfy the BICE,
you need to comply with the Impartial Conduct Standards
(ICS) during the transition period that ends this December
31, although likely to be extended to 2019. The ICS require
that you: 1) satisfy the best interest standard of care—in
essence, identical to ERISA’s prudent man standard and
duty of loyalty; 2) charge no more than reasonable compensation; and 3) make no materially misleading statements.
Thus, you will be subject to the new fiduciary standard
under both ERISA and the BICE for the rollover recommendation. Then, your discretionary investment management
services for the IRA will not be subject to a standard of
conduct under either the IRC or ERISA.
The new DOL