It is the rule that we can’t stop talking — and writing — about, even though it’s still not public. ERISA attorney and luminary Fred Reish recently took on the issues associated with distribution advice and education.
In a blog post, Reish notes that there are two issues that support the notion that under the DOL’s fiduciary proposal, an adviser should not recommend that a participant take a distribution and roll it over to an IRA, but instead should provide distribution education.
The first is that the recommendation to take a distribution must be in the best interest of the participant, and in order to make a prudent recommendation, the adviser needs to investigate the relevant factors that a knowledgeable person would want to know to make that decision. According to Reish, these include:
- the investment expenses in the plan as opposed to those in an IRA;
- the costs for advice in the plan versus those in an IRA;
- the range of investment options in the plan versus those in an IRA, and whether a larger range of investments is advantageous to the participant; and
- the flexibility and costs of withdrawals from the plan as compared to an IRA.
All of which he notes require “quite a bit of investigation and analysis” — but together do not rise to the level of a prohibition.
Reish notes that the second issue is that — and this is an issue that NAPA and the American Retirement Association have raised previously — if the adviser makes more in the IRA than in the plan, it is a prohibited transaction.
Reish explains that if the adviser doesn’t make anything from the plan (that is, he isn’t the adviser for the plan), but will receive 1% per year for advising the IRA, it is clearly in the best interest of the adviser to recommend a rollover, but is it right for the participant? The DOL says that is a conflict, and financial conflicts are prohibited unless there is an exemption. But there isn’t an exemption specifically on point.
Reish goes on to note that while people think that the Best Interest Contract Exemption (BICE) is intended to apply, it isn’t clear what BICE requires in this situation. So until the final BICE is issued, it isn’t clear how advisers will be able to avoid prohibited transactions if they make distribution recommendations.
The way around this (assuming the issue isn’t clarified in the final fiduciary regulation)? If an adviser provides unbiased and good quality distribution education, that’s not considered a recommendation. As a result, the prohibited transaction rules don’t apply.
Reish goes on to explain that these rules will also apply to recommendations to withdraw or transfer money from IRAs; it’s not just a plan issue.
