Come June 30, 2020, broker-dealers will be required to comply with the Security and Exchange Commission's Regulation Best Interest when recommending retail investors roll over 401(k) assets to IRAs. Under Reg BI's Care Obligation, brokers will have to have a "reasonable basis to believe that the IRA or IRA rollover is in the best interest of the retail customer at the time of the recommendation and does not place the financial or other interest of the broker-dealer ahead of the interest of the retail customer," according to language in the final rule. Will the best interest requirement stem the flow of 401(k) assets into IRAs, which held $8.8 trillion in assets at the end of 2018? Time will tell, says Aron Szapiro, director of policy research for Morningstar. "We're not sure," Szapiro told BenefitsPRO. "But we expect IRA assets to continue to grow. Even under the Labor Department's fiduciary rule, which was much more prescriptive than Reg BI, our expectation was there would still be substantial flows to IRAs through rollovers, but advisers and brokers would have to demonstrate why a rollover recommendation was given and offer advice backed by quantitative value." The inclusion of IRA recommendations under Reg BI was added in the final rule, due in large part to the recommendations of the SEC's Investor Advisory Committee. SEC Chairman Jay Clayton, the two Republican commissioners who voted to pass Reg BI, and high-level commission staffers who worked to craft the rule have said that Reg BI unequivocally raises brokers' standard of care over FINRA's suitability requirement. Consumer advocates argue that will not be the case, and that brokers will be able to give conflicted advice so long as they satisfy the rule's disclosure requirements. In the final rule, the SEC explicitly said, "the standard of conduct established by Regulation Best Interest cannot be satisfied through disclosure alone." Despite their many criticisms of the rule, consumer advocate groups are supportive of Reg BI covering IRA rollover recommendations. |

Many low-cost 401(k) plans lack drawdown mechanisms

Some 401(k) plan participants enjoy fees that are so low on their investments that it will be difficult for brokers to make the case for a rollover under the Best Interest standard, said Szapiro. "But even in those cases, there is real value to good investment advice," he added. "The reality is that most plan sponsors have not put in place drawdown mechanisms for retiring plan participants. Some plan sponsors would like to change that, but some view the assets of retired workers as a liability they want to get off their books. That's why we think IRA assets will continue to grow, even if Reg BI proves to be effective." The debate over whether Reg BI goes far enough to address conflicts of interest on rollover advice is likely not over. Commissioner Robert Jackson, the lone Democrat and dissenting voice on last week's Reg BI vote, suggested the regulation could be reopened, and a uniform fiduciary standard sought for brokers and investment advisers under a new Presidential administration, and under new leadership at the SEC. Despite the debate, Szapiro says "there is no question" that Reg BI raises brokers' requirements over the suitability standard on IRA rollover advice. The SEC's final rule gives several pages of specific discussion on the application of the Care Obligation to IRA rollovers, beginning on page 295 of the document. In the slides above are some highlights, quoted directly from the final rule. For those who prefer text-based reading, the excerpts also follow below: 1) "The Care Obligation will require a broker-dealer to have a reasonable basis to believe that the IRA or IRA rollover is in the best interest of the retail customer at the time of the recommendation and does not place the financial or other interest of the broker-dealer ahead of the interest of the retail customer, taking into consideration the retail customer's investment profile and other relevant factors, as well as the potential risks, rewards, and costs of the IRA or IRA rollover compared to the investor's existing 401(k) account or other circumstances." 2) "When making a recommendation to open an IRA, or to roll over workplace retirement plan assets into an IRA rather than keeping assets in a previous employer's workplace retirement plan (or rolling over assets to a new employer's workplace retirement plan), broker-dealers should consider a variety of factors, the importance of which will depend on the particular retail customer's needs and circumstances." 3) "In addition to the Factors to Consider Regarding a Recommendation to a Particular Retail Customer discussed above, as well as the Retail Customer's Investment Profile, broker-dealers should consider a variety of additional factors specifically salient to IRAs and workplace retirement plans, in order to compare the retail customer's existing account to the IRA offered by the broker-dealer." 4) "These factors should generally include, among other relevant factors: fees and expenses; level of service available; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; holdings of employer stock; and any special features of the existing account." 5) "With respect to available investment options, we caution broker-dealers not to rely on, for example, an IRA having 'more investment options' as the basis for recommending a rollover. 6) Rather, as with other factors, broker-dealers should consider available investment options in an IRA, among other relevant factors, in light of the retail customer's current situation and needs in order to develop a reasonable basis to believe that the rollover is in the retail customer's best interest. 7) "While these examples may be relevant to an analysis of available options, this list is not meant to be exhaustive." 8) "Furthermore, each factor generally should be analyzed with respect to a particular retail customer in order for a broker-dealer to form a reasonable belief that the recommendation is in the best interest of that retail customer and does not place the financial or other interest of the broker-dealer ahead of the interest of the retail customer." 9) "Finally, as described above, certain factors may have more or less relevance, or not be relevant at all, depending on the particular facts and circumstances of each recommendation." 10) "Decisions about which type of account to open have the potential to greatly affect their costs. Moreover, both rollover and account type recommendations are recommendations of an 'investment strategy involving securities' that can have substantial potential long-term impacts on investors. Both types of recommendations inherently involve potential conflicts of interest, making it critical that advisers and brokers put their clients' interests ahead of their own in making such recommendations."—Investment Advisory Committee letter to SEC Commissioners regarding advising Reg BI cover rollover recommendations. READ MORE: SEC, DOL moving in tandem on investment advice rules Suitability plus? Lawyers say SEC proposal lacks clarity CFA Institute says SEC has immediate authority to clarify broker roles Will Reg BI preempt state fiduciary rules? 8 highlights of Nevada's fiduciary proposal Maryland sets fiduciary rule in motion