The Department of Labor’s fiduciary rule is in limbo, and while some advisors and financial services firms welcome that change of status, it can cause compliance problems for others who handle IRA rollovers from 401(k) plans. I recently asked Joan Neri, counsel with law firm Drinker Biddle & Reath LLP in Florham Park, N.J., for her advice on how plan consultants and advisors should proceed in the post-fiduciary rule environment. Neri, a member of Drinker Biddle’s Best Interest Compliance Team, shared her insights in a phone interview. Part I considered the fiduciary consultant’s perspective; this Part II discusses considerations for non-fiduciary advisors and best practices for avoiding compliance problems with IRA rollovers.
WealthManagement: Which regulations must non-fiduciary advisors consider with IRA rollovers from 401(k) plans?
Joan Neri: If you’re not a fiduciary under the current DOL rules, you can make recommendations to participants without concern about the ERISA fiduciary standard of conduct and the prohibited transaction rules. However, the advisor still needs to consider the SEC and the FINRA rules.
These regulators take an interesting approach for IRA rollovers. What they say is that an IRA rollover recommendation is going to be, typically, a securities recommendation. The reason why they say this is because it’s treated as two transactions: as the liquidation of the investment in the participant’s plan account, which would normally involve selling securities in the account and as a new investment recommendation of security purchases in the IRA. Viewed as a securities transaction, a rollover recommendation is subject to SEC and FINRA rules.
The new SEC regulation that came out, Regulation BI, looks a lot like the best interest standard that was in the DOL rules. There’s not as much meat on it but it has the same verbiage about acting in the best interest of the investor when making a recommendation. And, not only that, the SEC points to FINRA, primarily FINRA’s Notice 13-45, and uses that as a basis for describing the type of approach that advisors should engage in when they’re recommending a rollover.
FINRA lists a number of factors that broker/dealer firms should consider in order to make sure that a rollover recommendation is suitable using FINRA’s suitability standard. Those factors include comparing the services, the fees and the investment options under the plan and the IRA. FINRA explains that these factors and others should be evaluated and then the recommendation should be one that aligns with the investor’s needs, investment objectives and risk tolerance.
Those are the same key three factors the DOL said must be considered to satisfy the impartial conduct standards that were in the BIC exemption. It’s also the same factors the SEC considers as indicated by its reference to FINRA Notice 13-45. So, we’ve definitely got a convergence which is helpful in developing a best interest practice for advisors.
WM: What are some best practices with IRA rollovers for fiduciary and non-fiduciary advisors?
Joan Neri: If the advisor doesn’t want to be viewed as a fiduciary under the DOL rules or doesn’t want to be subject to the SEC best interest/FINRA suitability requirements of Notice 13-45, then the advisor could just take on the role of educator. Now, it’s a tricky role. The advisor must make sure that he is presenting objective information about the investor’s options when the investor is considering a rollover. For instance, “Here is what you should consider if you keep your money in the plan, here is what you should consider when you roll it over to an IRA and—if relevant—here is what you should consider if you are rolling over your plan account balance to another employer’s plan.” But, it’s very difficult to do that in the real world because an investor who asks the question about whether to rollover is likely looking for the expert to advise.
For advisors who realize that they’re probably going to have to make a recommendation in order to keep the client relationship, I suggest they dust off the checklist of factors that they already may have put in place to satisfy the vacated DOL fiduciary rule and/or FINRA Notice 13-45. An advisor who follows that approach will satisfy the DOL’s impartial conduct standards so as to take advantage of the DOL’s non-enforcement policy and will also satisfy the SEC best interest/FINRA suitability standards.
Some advisors may be disappointed because they thought they could throw out their checklists once the DOL fiduciary rule was vacated, but they really need to continue that approach to satisfy these regulatory requirements.
