PLANADVISER - May/June 2018 - 52

ERISA vista
Rollover
Recommendations
Suggesting an IRA may still be prohibited
ADVISER 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.
If the adviser is a fiduciary to
the plan under the five-part test,
the recommendation to roll
money over is a fiduciary act.
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.
52 | planadviser.com may-june 2018 Art by Tim Bower
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