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ARA Asks DOL for Clarity on Rollover Recommendations

The March 15 decision by the 5th U.S. Circuit Court of Appeals to invalidate the DOL fiduciary rule resolved some issues – and created some uncertainties for retirement plan advisers, most notably their status regarding rollover advice to plan participants in plans to which the adviser is currently a fiduciary investment adviser.

In the aftermath of that ruling, the Labor Department issued Field Assistance Bulletin (FAB) 2018-02, outlining an enforcement policy designed to reduce potential problems resulting from good faith compliance with the 2016 fiduciary rule and the regulatory uncertainties resulting from the return to the 1975 fiduciary regulation following the 5th Circuit’s ruling.

‘Back’ to the Future?

As the American Retirement Association (ARA) explains in an Aug. 7 letter to Preston Rutledge

, head of the DOL’s Employee Benefits Security Administration (EBSA), under the 2016 regulation it was clear that essentially all recommendations to distribute or transfer assets from an ERISA plan were fiduciary advice, and that compliance with the conditions of the Best Interest Contract Exemption (BICE) would exempt any prohibited transactions that might be related to such a recommendation. But now that we’re back under the 1975 regulation, many rollover recommendations may no longer be fiduciary recommendations – since, as the letter notes, such recommendations may be “one-time” advice that are not “regularly” provided for purposes of the 1975 regulation.

The Labor Department previously issued guidance (Advisory Opinion 2005-23A) indicating that most rollover recommendations are not fiduciary advice under the 1975 regulation (“merely advising a plan participant to take an otherwise permissible plan distribution, even when that advice is combined with a recommendation as to how the distribution should be invested, does not constitute ‘investment advice’”). However, that same Advisory Opinion noted that “…someone who is already a plan fiduciary responds to participant questions concerning the advisability of taking a distribution or the investment of amounts withdrawn from the plan, that fiduciary is exercising discretionary authority respecting management of the plan and must act prudently and solely in the interest of the participant.” Additionally, the Advisory Opinion cautioned that “if, for example, a fiduciary exercises control over plan assets to cause the participant to take a distribution and then to invest the proceeds in an IRA account managed by the fiduciary, the fiduciary may be using plan assets in his or her own interest, in violation of ERISA section 406(b)(1).”

The Issue

Therein lies the dilemma for advisors who work with retirement plans. As the ARA letter outlines, if this guidance is applicable, “it suggests that fiduciary investment advisers to plans – advisers that already act in the best interest of participants, and that have long-term relationships with their plan clients – are ERISA fiduciaries when providing rollover recommendations to participants in those plans but are in a legal ‘grey area’ in which a prohibited transaction may or may not apply.” Moreover, unrelated persons selling financial products in rollover transactions to those same participants would not be considered ERISA fiduciaries – and thus would not be subject to the prohibited transaction rules.

The letter goes on to suggest that the Labor Department issue either a new FAB or issue FAQs clarifying that the non-enforcement policy outlined in the May 7 FAB applies in the context of a plan fiduciary advisor giving a rollover recommendation – and provides sample language to do just that.

As the ARA letter states, “clarification will be in the best interest of plan participants who may otherwise not have full access to professional fiduciary retirement advisers, but who likely will be actively solicited by non-fiduciary salespersons.”

“By clarifying the FAB’s applicability to an adviser who is a fiduciary to the plan from which the rollover comes, the Department can ensure that participants are able to receive fiduciary advice from trusted advisers,” the letter concludes. “Absent this clarification, we are concerned that legal risk and uncertainty may cause many fiduciary advisers and their financial institutions to avoid such rollover recommendations.”