PLANADVISER - September/October 2020 - 42

ERISA vista
Fred Reish and Joan Neri
A Return to Rollover Advice
The DOL revisits the potential for adviser/client ongoing relationships
QUESTION: I am an RIA [registered investment adviser].
Most of my clients are individuals, and many of my new
client relationships are IRA [individual retirement account]
advisory accounts resulting from my rollover recommendations
to people who are 401(k) participants. I don't provide
advice, or any other services, to 401(k) plans. How does the
Department of Labor (DOL)'s recent proposed exemption
affect the rollover advice I provide to plan participants?
ANSWER: In the preamble to its proposed exemption-a
follow-up to its 2016 fiduciary rule-the DOL changed its
interpretation of investment advice to greatly expand the
circumstances under which a rollover
recommendation
could be considered fiduciary advice. Unless the agency
changes its position, rollover recommendations to plan
participants will, in most cases, result in fiduciary status for
the adviser, subject to the standard of care of the Employee
Retirement Income Security Act (ERISA) and prohibited
transaction (PT) rules. The PT would be receipt of the IRA
advisory fee, which would not have been paid absent the
participant accepting the advice. In that case, you'd need to
satisfy the conditions of an exemption as described below.
The proposed exemption, if it is finalized, will be available
to an adviser who makes a fiduciary recommendation
and, as a result, receives additional compensation. In most
instances, rollover advice will result in additional compensation
for the adviser-e.g., the IRA advisory fee-that would
not have been received except for the recommendation. The
threshold question is whether an adviser who has rollover
discussions with a participant is making a fiduciary recommendation
under ERISA. If so, the receipt of the IRA advisory
fee would be a PT and an exemption would be needed.
A DOL regulation defines fiduciary advice as an arrangement
that satisfies a five-part test where the adviser is
1) providing advice about investments for a fee or other
compensation, 2) on a regular basis, 3) under a mutual
understanding, 4) that the advice will form a primary basis
for the investment decision, and 5) that the advice is individualized
based upon the investor's particular needs. In
the past, the DOL said (DOL Advisory Opinion 2005-23A) if
an adviser who is not already a fiduciary to an ERISA plan
recommends a rollover to a participant in that plan, the rollover
recommendation is not a fiduciary act under the fivepart
test; the reason was that the adviser wasn't providing
recommendations on a regular basis.
However, in the new proposal's preamble, the DOL says it
has changed its mind: It's adopting a new, expansive interpretation,
which says a regular basis exists where:
* The adviser has a pre-existing financial advice relationship
with the participant, including a non-ERISA fiduciary
advisory relationship, and
* The adviser establishes a new relationship that is the
first step, or is anticipated to be the first step, in an ongoing
advisory relationship-e.g., providing ongoing financial
advice to the participant's rollover IRA.
The DOL acknowledges that merely executing a sales
transaction at the plan participant's request does not by
itself confer fiduciary status. However, it points out, even
under those circumstances, the regular basis requirement
may be met if, for example, the adviser will receive trailing
commissions for ongoing services with respect to an annuity.
Under this new interpretation, an adviser who has no
prior relationship to the plan or the participant and recommends
that a participant roll over 401(k) monies to an IRA
with the adviser would satisfy the regular basis requirement.
This is because the rollover advice would be the
first step in an ongoing IRA advisory relationship. Also, it's
likely that the other four parts of the five-part test would
be met. Under a mutual understanding with the client-e.g.,
an advisory or IRA account agreement-the adviser would
be receiving the IRA advisory fee as a result of the rollover
advice. The advice to roll the participant's money over
would be individualized based on the person's needs-e.g.,
it would have to comply with the Securities and Exchange
Commission (SEC)'s requirement that recommendations
be consistent with a client's investment profile-and the
advice would be a primary basis for the rollover decision.
If the rollover advice is a fiduciary act under the five-part
test, that recommendation would be subject to the ERISA
duty of care, and the adviser would be committing a PT in
receiving the IRA advisory fee. The adviser could then rely
on the proposed exemption, if finalized, in order to receive
the otherwise prohibited compensation.
But the exemption will have conditions that must be
satisfied. We will discuss these in our next column.
Fred Reish is chairman of the financial services ERISA practice at law
firm Faegre Drinker Biddle & Reath LLP. A nationally recognized expert
in employee benefits law, 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.
42 | planadviser.com September-October 2020
Art by Tim Bower
http://www.planadviser.com
PLANADVISER - September/October 2020

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