Reconciling rollover advice with Reg BI and DOL fiduciary standard

The fiduciary issue has been in the spotlight for advisors who provide retirement investment advice to clients for years—advisors recently grappled with the DOL fiduciary rule and its application, but following its demise were faced with the need to determine how the DOL’s previously applicable “prudent man” standard would mesh with the SEC’s new Regulation Best Interest (“Reg BI”).

Reg BI shocked many advisors by clearly providing that the new best interest standard applies to advisors who provide recommendations with respect to rollovers between retirement accounts, such as from an employer-sponsored plan into an IRA.

Unfortunately, while the spirit of the two rules is similar, the new SEC standard does not precisely match the DOL fiduciary standard—meaning that advisors who provide rollover advice must exercise caution to ensure compliance with both regimes.

Evaluating rollover transactions under Regulation Best Interest

Advisors who make recommendations regarding the rollover of retirement assets between plans will now be required to comply with the SEC’s Reg BI, which means establishing that the rollover is in the client’s best interest before advising the rollover.

Establishing that the rollover transaction was in the client’s best interests can be accomplished in a number of ways, including by showing that the advisory services provided by the advisor with respect to the rollover IRA add value as a tool for meeting the client’s specific goals.

In cases involving rollover IRAs, the advisor may be able to establish that the rollover is in the client’s best interests even if the fees associated with the IRA are higher than those in an employer-sponsored plan, as Reg BI clearly states that fee levels are not the only relevant consideration.

In other situations, the investment options or investment mix in the rollover IRA may better suit the client’s goals—but the availability of a wider variety of investment options in a rollover IRA cannot generally be the sole basis for determining that the rollover is in the client’s best interest.

Specifically, advisors who make rollover recommendations must consider several non-exhaustive factors listed in the rule itself, including these:

1. fees and expenses
2. available services in both plans
3. available investment options
4. availability of penalty-free withdrawals from the accounts
5. how required minimum distribution (RMD) rules can impact the client’s goals
6. whether the plan provides any level of creditor protection
7. whether the plan permits holding of employer stock
8. any additional special features of the initial account

Contrast: Application of the DOL ‘Prudent Man’ fiduciary standard

Both Reg BI and the DOL’s fiduciary standard require that the advisor act in the client’s best interests, but the two standards are not exactly the same when it comes to rollover recommendations.

Each rule requires that the advisor conduct a detailed analysis to determine whether the rollover is in the client’s best interest—meaning that the advisor must evaluate all potential options, such as taking a distribution or leaving the funds in the current plan, in comparison to rolling the funds into another plan, in light of the client’s goals and financial position.

However, the DOL rule applies only if the advisor or firm is a fiduciary to the plan in question, or a fiduciary with respect to the plan participant.

Reg BI, on the other hand, applies anytime that a rollover recommendation is made to a retail investor, regardless of fiduciary status and regardless of whether the plan in question is an ERISA-covered plan.

Further, if the rollover recommendation could trigger a conflict of interest, Reg BI requires that the advisor deliver Form CRS to the customer.

Form CRS is a short—no more than four-page—summary detailing the relationship between the advisor and client, the applicable standard of conduct under Reg BI and the fees and compensation structure generally associated with the relationship.  Form CRS must also contain a section detailing the firm’s disciplinary history and direct the client where to look for additional relevant information.

Under the DOL standard, conflicts of interest are generally not permitted at all—regardless of disclosure—unless a specific exemption applies (remembering that the best interest contract exemption was vacated along with the rest of the most recent DOL fiduciary rule).

If no exemption applies, the receipt of additional compensation because of the fiduciary recommendation could cause the advisor to commit a prohibited transaction.

Conclusion

The intersection of Reg BI and the DOL standard can be confusing, and the situation becomes even more complex when state-level fiduciary rules are considered.

In general, firms and advisors should aim to have a process in place to obtain all information about the relevant plans, including plan features, fees and services, so that an informed rollover recommendation can be made in light of the specific client’s circumstances.

• See previous coverage of the previously applicable DOL fiduciary rule in Advisor’s Journal.
• For in-depth analysis of the fiduciary standard generally, see Advisor’s Main Library.
• Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.

Robert Bloink, Esq., LL.M., has taught at the Texas A&M University School of Law and the Thomas Jefferson School of Law; in the past decade, Bloink has initiated $2B+ in insurance & alternative asset class portfolios, and previously served as a senior attorney in the IRS Office of Chief Counsel for the Large- and Mid-Sized Business Division. Bloink is also the co-author of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.

William Byrnes, Esq., LL.M., CWM, is an executive professor and associate dean of special projects at the Texas A&M University School of Law. A pioneer of online legal education, he also is the author or co-author of 20 tax books and legal treatises. Byrnes is also the co-author of Tax Facts, a reference solution that helps to answer critical tax questions and provides the latest tax developments.