Think you’ll find rollovers more complicated under the Labor Department’s fiduciary regulation? You aren’t alone.
In a recent blog post, ERISA attorney Fred Reish notes that banks, as well as advisors, may find themselves confronted with a fresh set of challenges.
Reish notes that it appears to be a fairly common practice for employees at bank branches to recommend that customers set up IRAs and put the money into certificates of deposit, and for the bank employees to receive bonuses or rewards of some kind for the IRAs investments in the CDs. However, based on the wording of the new fiduciary rule, if a bank employee recommends that an IRA invest in a certificate of deposit, and is compensated directly or indirectly for that recommendation, Reish reminds us that is a fiduciary act for compensation, and since that compensation is not stated and level, the payment is a prohibited transaction – and that means that an exemption is needed.
Or consider programs that result in referrals to a bank’s trust department, affiliated investment adviser and affiliated broker-dealer. While the Best Interest Contract Exemption is generally available for compensation for these types of referrals, Reish notes that it may be difficult for banks to comply, since the cost and effort of BICE compliance can be significant, but the amounts paid under these referral arrangements are, at least for each individual referral, relatively small.
And what if the bank customer is retiring and asks about rolling over his 401(k) account? If the bank employee recommends a rollover, Reish notes that that would be fiduciary advice under ERISA, and as such, the bank and its employee would need to develop the recommendation through a prudent process, considering at the least the investments, services and expenses in the plan and the proposed IRA – just like an advisor. In addition, the recommendation could be a prohibited transaction, and an exemption would be needed.
