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What Does the 5th Circuit Decision Mean for Rollover Recommendations?

The 5th Circuit Court of Appeals recently “vacated” the DOL’s fiduciary rule and exemptions. What does that mean for recommendations to participants that they take plan distributions and roll them over to IRAs?

Well, according to the latest blog post from noted ERISA attorney Fred Reish, “It means a lot… in some cases.”

After noting that the 5th Circuit’s decision is not final yet (at the earliest, it will take effect on May 7), Reish notes that ahead of the decision’s effective date, a recommendation to take a plan distribution and rollover is a fiduciary act and must be based on a prudent analysis of the participant’s needs and a comparison of the plan and the IRA.

What if the “new” fiduciary rules (including the Best Interest Contract Exemption, or BICE) are thrown out? Reish notes that under the old rules, a recommendation to a participant to take a distribution and rollover was not, in most cases, a fiduciary recommendation, and thus wasn’t subject to the prudent man and loyalty requirements, nor was it a prohibited transaction.

Reish cautions, however, that if the advisor was a fiduciary to the plan, a recommendation to roll over a plan distribution to an IRA would be a fiduciary act, and a prohibited transaction if the fiduciary recommendation causes the advisor (or the advisor’s firm) to earn more from the IRA than it did from the plan. And, unlike the “new” fiduciary rule, there is no BICE to help get around that prohibition – a circumstance that Reish says might be exacerbated by the expansion of fiduciary roles that many broker-dealers embraced in the aftermath of the fiduciary rule.

What does this mean?

Reish cautions that, “Until this plays out, advisors and their firms need to satisfy two conflicting rules,” and then acknowledges that would be impossible. Either you would have to assume that the new rules apply, and have the BICE to help avoid prohibited transaction issues – or assume (unless you are a plan fiduciary) that the rules don’t apply, and there is no prohibited transaction issue.

“Unfortunately,” Reish notes, “until the legal ‘dust’ settles, in the sense of a resolution of the litigation, we won’t know which rules apply.” He assumes that many advisors/advisory firms will continue operating under the new rules in the interim – though how long the interim will last remains unclear.
And then there is always the possibility that during this interim period, the Labor Department will come out with a new proposed rule and exemptions.
Reish offers as his guess that those revised rules would (still) say that a recommendation to take a distribution and roll it over is still a fiduciary act. Though what he describes as “the interesting part” would be what the new exemption might require.

The bottom line: this ERISA lawyer (Reish) advises getting legal advice.