DOL Fiduciary Proposal Subjects Rollover Advice to ERISA Fiduciary Standard of Care

In our previous blog post, we commented that the Department of Labor’s (DOL) fiduciary rule proposal can be viewed as the “ERISA-fication” of Individual Retirement Accounts (IRAs). For example, the DOL’s proposal includes a new proposed exemption called the Best Interest Contract Exemption (BIC Exemption). Most sales of investment products to IRA owners would need to comply with that exemption, which would require financial professionals to comply with the ERISA’s fiduciary standard. This would be the case even though the Internal Revenue Code — which governs IRAs — does not have a fiduciary duty provision.

Many commenters believe that, with respect to IRAs, the DOL is most concerned about rollover advice. The following Q&As address the potential impact of the DOL’s proposal on IRA rollover advice.

How Would the DOL’s Proposal Impact IRA rollovers?

Under the proposal, a financial professional would be acting as an ERISA “fiduciary” in recommending that a retirement plan participant rollover his or her plan account balance to an IRA. This is not the case under current law. If the DOL’s proposal is adopted, financial professionals would not be able to recommend an IRA if the sale of the IRA would result in the payment of a commission to the financial professional.  In addition, financial professionals could not recommend a proprietary IRA because ERISA prohibits a fiduciary from causing an additional fee to be paid to a person in whom the fiduciary has an interest (e.g., the financial professional’s employer).

Is There an Exemption that Permits IRA Rollover Recommendations?

Yes, the proposed BIC Exemption appears to cover rollover recommendations. But the BIC Exemption is complex and not workable as proposed. (Please see our previous blog post for more detail.) Among other things, financial institutions and professionals would have to contractually agree to act in the “best interest” of a client “without regard to the financial or other interest” of the financial institution or professional. It is currently unclear how a financial professional could recommend an IRA “without regard” to the financial professional’s, or its employer’s, interest if the sale of the IRA would result in a payment of a commission to the financial professional or, in the case of proprietary IRAs, the payment of fees to the financial professional’s employer.

Why is the DOL Interested in IRA Rollovers?

The DOL seems to believe that plan participants are generally better off in staying in their plans because IRAs, on average, may have higher expenses than plans. By focusing so much on expenses, the DOL appears to view all IRA rollover advice as suspect. The DOL also appears to be concerned that IRAs do not have plan fiduciaries (e.g., plan sponsor or committee) who will act in the participants’ best interest in selecting and monitoring plan investment options. In this regard, the DOL’s proposal indicates that it views plan participants (along with IRA owners and small plans) as “retail” investors who need more protection from allegedly conflicted advice. This “retail” versus “institutional” concept is new and generally not found in existing DOL guidance.

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The DOL’s interest in IRAs is not surprising because IRAs hold $8 trillion in retirement savings. But the DOL’s apparent dislike of IRAs runs counter to the popularity of IRAs.  Please stay tuned for additional blog posts on the DOL’s fiduciary rule proposal.


Affiliation Disclosures

Jason H. Lee, Partner with Groom Law Group, co-authored this blog post. Stephen M. Saxon and Jason H. Lee are compensated attorneys with the Groom Law Group, and are not affiliated with any company of the Principal Financial Group®. The views they express are their own and not necessarily those of The Principal® or any member company.

While this communication may be used to promote or market a transaction or an idea that is discussed in the blog, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal or Groom Law Group are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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