RIAs advising 401(k) plans that don't have broker-dealer affiliations or revenue relationships with proprietary investment products will likely feel little impact from the Department of Labor's proposed fiduciary rule, according to attorneys at Drinker Biddle.
That's because typically, RIAs acknowledge their fiduciary status and are compensated on a fee basis. The proposal's Best Interest Contract Exemption will allow advisors to recommend commission-based products so long as the advisor reveals both the costs of those products to investors and their intention to work as a fiduciary, or solely in the best interest of plan participants.
But, as the attorneys point out, RIAs could face higher disclosure obligations, new costs, and potential regulatory exposure if they are offering advice on how participants rollover plan assets.
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The DOL's proposal lays out six proposed prohibited transactions. An RIA that advises a participant toward an IRA that has higher fees could be engaging in a prohibited transaction under the rule.
"The proposed regulation defines fiduciary advice to include recommendations to participants to take distributions from retirement plans, as well as recommendations on how to invest assets to be rolled over or distributed from a plan or IRA," write the attorneys.
Such a scenario could constitute a prohibited transaction, and require even fee-based RIAs to comply with the Best Interest Contract Exemption provision of the proposal.
That could be "difficult or expensive," note the attorneys.
In order for the transaction to be exempted, not only will the RIA have to issue and sign a contract saying they are fiduciaries and agree to receive no more than "reasonable" compensation, they would have to provide detailed costs and compensation on IRAs annually.
But as the notice points out, RIA fiduciaries with an existing advisory relationship to a 401(k) plan already act as fiduciaries when they then advice participants on rolling over assets.
The caveat in the proposal, say the attorneys, will be when RIAs without an existing plan relationship then advise of individual rollovers.
"Under the proposal, giving advice to a participant about taking a distribution and rolling over to an IRA will be a fiduciary act, subjecting the RIA to the prohibition transaction rules, and, therefore, the RIA will need to obtain exemptive relief if the recommendation results in a prohibited transaction," the notice explains.
One alternative RIAs could deploy to giving fiduciary advice on rollovers, and incurring the cost and risk to do so, would be to make use of the education "carve out" in the DOL's proposal.
Education programs can be provided to participants, including an explanation of rollover options, without the provider of the education assuming fiduciary status.
"It seems likely RIAs will choose to provide distribution education to avoid the difficulty of complying with Best Interest Contract Exemptions," the attorneys suggest.
And for those RIAs that hope to provide direct advice to participants on rollovers, the notice suggests maintaining the same fee on an IRA product as was charged on participant assets when they were in plan, RIAs could avoid engaging in a prohibited transaction.
And avoid the potentially costly effort to furnish a Best Interest Contract Exemption.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
