Right now, most RIAs recommend IRA rollovers without having to jump through a lot of hoops, but DOL's 'exemption' makes a federal case out of suggesting the move away from the protection of the employer’s plan

July 14, 2020 — 7:21 PM by Jason Roberts, Guest Columnist

Brooke's Note: After we published Lisa Shidler's article last week about the new DOL rule, I got a call from one of its sources, Jason Roberts. See: New DOL fiduciary 'rule' unshackles broker-dealers to pursue commissions, declaring brokers ERISA fiduciaries by making simple disclosures The ERISA lawyer affirmed that the article was correct--as far as it went. Yet he worried readers of RIABiz could still come away less than fully informed. The problem, he explained, is that it emphasized the DOL effort's self-designation as a "deregulation." That slant toward subtraction might give RIAs the impression that, if anything, they are free to breathe a sigh of relief. But Roberts stresses that what could be viewed as a slackening of the rules for brokers is quite the opposite for RIAs.  As he began to explain this seeming paradox to me, it became apparent that this fine distinction quickly ends up in the weeds. In an act of goodwill and mercy for me and the whole RIA business, Roberts intervened and spent the weekend and part of Monday putting his explanation on paper to create the column below. The one-sentence journalist version of events is that the ring of fire the SEC put brokers through in Reg BI regarding 401(k) rollovers to IRAs, the DOL has now imposed on RIAs. But there is more to the story. Read on.

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The U.S. Department of Labor (DOL) published it long-awaited regulation June 29 to fill the void left when the Fifth Circuit Federal Court vacated the Obama-era “fiduciary rule.”  See: 'Poof, it's gone!' DOL quietly strips two heavy lifts from the fiduciary rule as it makes delay official

Technically, the DOL wrote a proposed exemption from ERISA’s prohibited transaction rules. The exemption would allow those serving as fiduciaries to earn additional compensation (or even receive payments from third parties) as a result of their “investment advice.” 

The impact of this proposal on investment advisers (as opposed to brokers) cannot be overstated. For example, if finalized as proposed, any time advisers recommend an IRA rollover they will need to take specific steps to satisfy the conditions of the exemption.  See: New 'anti-regulatory' DOL Fiduciary Rule figures to keep $10-trillion IRA market under the IRS, allow some conflicted advice; does Rule's revival from dead presage Joe Biden presidency?

If they do not, they will engage in a prohibited transaction under ERISA and, at a minimum, be liable for disgorgement of fees with interest, excise taxes and potential “losses” attributed to the advice.

The proposal is on a fast track with a comment period ending Aug. 6.  We estimate it’s 90% to 95% likely to be finalized before the November elections.  The timing is designed to make it more difficult for a potential new administration to issue its own rule or overturn this one.  

Indeed, Democratic presidential candidate Joe Biden unveiled his “Build Back Better” economic agenda during a speech in Pennsylvania on Thursday (July 9) and, suffice to say, his priorities do not align with those of the current administration.  

If the current DOL failed to issue a new rule, Biden could essentially have a blank slate from which to craft a much more comprehensive regulation like the one we saw in 2016.

How does it work?

Today, ERISA fiduciaries are held to ultra-high standards of care (e.g., duty to give prudent advice that is solely in the interest of participants).  

As a fiduciary, certain activities are also per se prohibited.  For example, giving advice that will increase your compensation or that of an affiliate is a prohibited transaction.  Receiving payments from third parties as a result of investment advice is also prohibited.  

But this measure provides a set of conditions that could be satisfied to be exempted from the prohibited transaction rules.

In the preamble to the proposal, the DOL makes a couple of significant interpretations that will make more RIAs subject to its requirements.  For example, it states that if you provided ERISA fiduciary services to an individual while he/she was a plan participant and you recommend he/she roll over to an IRA, the recommendation would be considered investment advice under ERISA.  

Consequently, you would be prohibited from earning higher fees in the IRA unless you comply with the exemption.  

It is important to keep in mind that you do not need to have any relationship with the participant’s employer; you just need to be paid for providing advice relating to the individual’s plan account.  

If, for example, you advise, on a regular basis, a retail client (to whom you presumably serve in other capacities) on how to allocate his/her plan account, and you’re compensated via fees charged to other accounts (i.e., IRAs, taxable, etc.) or even by way of financial planning fees, that will suffice to make you an ERISA fiduciary.

This is not the end of the analysis, however.  

According to the proposal, if you recommend an IRA rollover and will provide investment advice or exercise discretion in the IRA, the rollover recommendation would be considered fiduciary and you would need to comply with the exemption.  

So, this is why investment advisers should be concerned.  When are you not providing ongoing advice or discretion to IRA clients?

Another interpretation embedded in the proposal relates to advice concerning “persons the Retirement Investor may hire to serve as an investment advice provider or asset manager” and would be considered fiduciary under ERISA.

 If you receive compensation for making such recommendations (e.g., to invest with a TAMP), whether from the client directly or, indirectly, from a third party, you will be a fiduciary under the proposal.  

If you are compensated by the third party, then you would need to follow the exemption to avoid the penalties associated with engaging in a prohibited transaction.

What is required? 

To comply with the exemption, RIAs, among other things, would need to:

  • Deliver a written acknowledgment of their fiduciary status under ERISA or the Internal Revenue Code, as applicable, along with a list of services and material conflicts of interest;
  • Adopt new compliance policies designed to “ensure compliance” with the Impartial Conduct Standards;
  • Conduct a retrospective review of compliance that is specific to the conditions of the exemption; and, 
  • The CEO would certify the review and firm’s compliance at least annually.

The Impartial Conduct Standards have three components: a best interest standard; a reasonable compensation standard and a requirement to make no misleading statements about investment transactions and other relevant matters. 

When it comes to recommendations “to roll over assets from a Plan to another Plan or IRA …, from an IRA … or … to a Plan, from an IRA to another IRA, or from one type of account to another (e.g., from a commission-based account to a fee-based account),” the exemption requires RIAs to document the specific reasons why it considered the rollover to be in the best interest of the retirement investor.  

The DOL states the following: 

“A prudent recommendation to roll over from an ERISA-covered Plan to an IRA would necessarily include consideration and documentation of the following: the Retirement Investor’s alternatives to a rollover, including leaving the money in his or her current employer’s Plan, if permitted, and selecting different investment options; the fees and expenses associated with both the Plan and the IRA; whether the employer pays for some or all of the Plan’s administrative expenses; and the different levels of services and investments available under the Plan and the IRA. For rollovers from another IRA or changes from a commission-based account to a fee-based arrangement, a prudent recommendation would include consideration and documentation of the services that would be provided under the new arrangement.”

While RIAs were not technically covered by Regulation Best Interest, these requirements impose substantially similar requirements when it comes to IRA rollovers.  Collecting, analyzing and documenting this type of information will take considerable time, and RIAs will now find themselves swept into the same position as their broker-dealer competitors.  

Some broker-dealers have adopted the position that their advisors do not recommend rollovers, so they do not need to follow the requirements of Reg. BI.

This approach may not be as viable under the DOL’s regulation, given the sweeping penalties at its disposal.  

The bar for what constitutes a recommendation is extremely low and is based upon facts and circumstances that surround the communication or series of communications.  If the DOL finds advisors are making recommendations and the firm is not complying with the exemption, it could lead to bet-the-company stakes.

How will it be enforced?

The exemption requires the foregoing documentation to be retained for six years, and the DOL will presumably be investigating firms for compliance.  

We also know that the DOL routinely shares information with Securities and Exchange Commission (SEC) in the context of examination and enforcement.  Even if a firm is not on the DOL’s radar, a referral from an SEC examiner could open the door a visit from the DOL.

From a penalties perspective, the DOL’s tools are much more exact than traditional securities industry regulators. The scope of any fines imposed by the SEC, for example, are subject to the judgment of the examiner, whereas prohibited transaction compliance is formulaic, and the penalties are set in stone.

What next?

We are encouraging firms to participate in the comment process and to follow the rule as it makes its way to a final regulation.  In the meantime, RIAs would be well-served to start evaluating their compliance programs relating to serving retirement plans and IRAs and confirm they are adequate given the rules in place today.  

In our experience, it is considerably less onerous to incorporate new requirements if you have a solid foundation in place.

Once the final regulation is published, affected firms are generally granted a period of time (i.e., 90 – 180 days) to comply before enforcement begins.  We believe this will be the case with the exemption as well.


Jason C. Roberts is the CEO Pension Resource Institute, an ERISA compliance consulting firm for RIAsbanks and , broker-dealers, and managing partner of Retirement Law Group in San Diego, a law firm specializing in ERISA and investment-related matters. He is a contributing author and faculty member for the Practicing Law Institute. Jason received his BSBA in Finance & Banking from the Univ. of Missouri and his JD from UCLA School of Law.



Mentioned in this article:

Pension Resource Institute, LLC
Compliance Expert
Top Executive: Jason C. Roberts

Retirement Law Group, PC

Top Executive: Jason C. Roberts



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Brian Patrick Murphy said:

July 15, 2020 — 7:20 PM

This type of regulatory oversight points to a need for the industry to rethink their standard business models. Specifically the DOL is obviously targeting "asset capture" programs here. If the advisory industry as a whole were to prioritize their fiduciary obligation to clients over fees, these types of regulations would be superfluous. I would suggest the way forward is to stop building "work-arounds" and rethink the problem with a fresh sheet of paper. For example, if the advisory business model didn't provide an incremental benefit to the advisor for rolling over old 401(k)s, this issue goes away.

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