With Fiduciary Rule, DOL Pursues Conflicts of Interest in the Rollover Process

By John Ortman • October 20, 2015 • 0 Comments

The biggest impact of the DOL's proposed fiduciary rule, a.k.a. the "conflict of interest rule," isn't on plans or plan advisors, it's on the IRA market, ERISA attorney Fred Reish told a workshop session at the ASPPA Annual Conference Oct. 20.

Reish was joined by Marcy Supovitz, incoming president of the American Retirement Association for 2016.

Why are regulators focusing on IRAs? It's all about the Baby Boomers and their money, Reish explained, as the current wave of retiring Boomers roll over their 401(k)s into IRAs. Some expect today's $7 trillion IRA market to grow to $15 trillion to $20 trillion within the next 10 years, he noted.

Federal regulators' focus on IRAs was prefigured by events in 2013, Reish noted. First came "401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants," a report issued by the Government Accountability Office in March 2013. That was followed by a FINRA report on conflicts of interest focusing on "key liquidity events" -- among which IRA rollovers were mentioned three times. Finally FINRA issued Regulatory Notice 13-45, which listed numerous factors that should be considered prior to a rollover, and "The IRA Rollover: 10 Tips for Making a Sound Decision,"  a guide for investors. Subsequently, in 2014 both FINRA and the SEC included rollover recommendations in their examination priorities.

Then came the DOL's proposed fiduciary rule in April 2015. The far-reaching rule will sweep most recommendations on IRA rollovers into ERISA's fiduciary standard of suitability. "The long and short of the rule," said Supovitz, is that the rule "does away with commissions" unless you're willing to comply with the rule's Best Interest Contract Exemption (BICE) -- a prospect that she termed "unworkable" for several reasons, including the fact that FINRA rules prohibit several things that are required to qualify under the BICE. 

Last August, the American Retirement Association suggested a solution to the problem the DOL proposed rule had created: a new "level-to-level compensation" exemption. The proposed exemption consists of four elements:

  • Compensation would be level on both sides of a rollover transaction; plan compensation could differ from IRA compensation, but neither could be based on any investment recommendations.
  • A written agreement would be executed prior to the transaction.
  • Compensation at the plan and the IRA levels would be disclosed.
  • Documentation would be provided outlining why a rollover is in an investor's best interest.

For more on the ARA's level-to-level compensation proposal, see our coverage of Supovitz' testimony on ARA's behalf at the DOL's August hearings here, a video of her testmony here and ARA's initial comments on the DOL rule here and (on the level-to-level comp specifically) here

Reish offered advice for those involved in rollovers based on his compilation of FINRA, SEC and DOL guidance to date:

  • Focus on education efforts -- especially on the four alternatives that are generally available to participants: leave their money in the plan, transfer it to a new employer's plan, take a taxable distribution, or roll it over into an IRA.
  • Use a checklist to guide your discussion with participants, including the four things that are most important to them: expenses (investment, services and administration), the range of investments available, the services that are available, and the distribution options that are available.
  • Disclose in writing your fees and expenses for advice and for IRAs.
  • Have participants sign an acknowledgment that they received the information above.

You'll find our other coverage of the 2015 ASPPA Annual Conference in the Conferences "station" on ASPPA Net.