'4-Part Harmonization' on Rollovers

By John Ortman • October 28, 2014 • 0 Comments

Advisors seeking to capture IRA rollovers face a "four-part harmonization" of regulatory and other government entities -- that is, SEC, DOL, FINRA and GAO -- in the words of ERISA attorney Fred Reish. Speaking at a workshop session at the 2014 ASPPA Annual Conference Oct. 28, the Drinker Biddle attorney was joined by fellow panelists Pete Swisher of Pentegra and Yannis Koumantaros of GROUPIRA.

His harmonization comment was a riff on the issue of the need for the DOL and the SEC to coordinate their separate efforts to revamp the definition of a fiduciary, but Reish believes that it's no coincidence that all four entities seem to be headed to the same destination. "I have to think they are talking to each other," he said.

If that's the case, their combined impact would be a force to be reckoned with. The DOL can regulate distributions from DC plans, Reish noted, "and if there's no distribution, there's no IRA rollover." The DOL can also regulate the actions and roles of plan fiduciaries. FINRA can regulate both. The SEC can regulate securities transactions and RIAs. And the Government Accountability Office (GAO) can lead the way via industry studies like its 2013 report, "401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants." In other words, harmonization.

As they look at distributions from DC plans and rollover issues, the four groups are all concerned with conflicts of interest and fees for mutual funds and advice. Reish highlighted the commonalities among the 2013 GAO report, DOL Advisory Opinion 2005-23A and FINRA Regulatory Notice 13-45. And both FINRA and the SEC included IRA rollover practices as an examination priority in 2014. 

In particular, FINRA Regulatory Notice 13-45 defined a suitable recommendation to a plan participant regarding an IRA rollover by listing seven elements, three of which are key, Reish said: investment options, services and fees and expenses. "This has led many advisors to back away from the suitable recommendation approach and more in the direction of education for participants," Reish observed. In fact, he added, all service providers in the IRA rollover market, both fiduciary and non-fiduciary, now face the recommendation-or-education choice. In either case, he advised, education should be a big part of what's provided, with an emphasis on the four choices facing participants who are considering taking a distribution from the plan:

  • leaving the money in the plan (in fact, Reish noted, more large plans are now offering in-plan options for decumulation purposes);
  • transferring the money to a new employer's plan;
  • cashing out; and
  • rolling the money into an IRA.

Reish suggested a conservative approach for advisors playing in the IRA rollover market: provide written disclosures of services, fees and expenses for the IRA and its investments. The key issue, he said, is to follow the lead of the regulatory entities and pay close attention to the financial well-being of the participant: "If the expenses in the IRA will be higher than in the plan, what is the justification for doing an IRA rollover?"

Reish had another piece of advice for advisors: "You should have an IRA rollover business model that accompanies your 401(k) business model." Koumantaros agreed: "Rollovers is a business you should be in. You just need to be sure you're doing it the right way. State and federal regulators are likely to do it poorly; it's incumbent on you to do it well."