What ‘Level-fee Fiduciary’ Means for Rollover Advice

Having tackled what could “unlevelize” a level-fee fiduciary’s status, ERISA attorney Fred Reish now takes on the issue of what it means to be a level-fee fiduciary when it comes to offering rollover advice.

In a recent blog post, Reish explains that in order to use the simplified, or “BIC-lite” (BIC being short for Best Interest Contract Exemption) alternative for recommending that participants take distributions and roll over to IRAs, the adviser must be a level-fee fiduciary.

Having described that criteria in a previous post, Reish notes that if a financial institution satisfies that definition, an affiliated adviser can use the BICE-lite simplified process for recommending that participants roll over to IRAs. On the other hand, if the compensation does not satisfy that definition, then the adviser and the financial institution (e.g., broker-dealer) must satisfy all of the BIC conditions in order to recommend a rollover without committing a prohibited transaction.

Reish highlights what he terms “key words” in the definition: “only fee received.” He then goes on to inquire whether this means that if the adviser (as well as the financial institution, and all affiliates and related parties) receives other forms of compensation, such as 12b-1 fees, then the adviser cannot levelize his or her compensation (for purposes of rollover recommendations) by offsetting the 12b-1 fees on a dollar-for-dollar basis.

Reish notes that at least one DOL speaker has said that if any additional compensation is received — even if it is offset — the level-fee fiduciary, or BICE-lite, approach is not available.

On the other hand, he notes that the definition does permit “compensation that is provided on the basis of a fixed percentage,” going on to note that if the additional payments are offset against the advisory fee, then the only compensation received by the adviser is the stated level fee.

Preamble Versus Exemption

Reish notes that the preamble to the BIC exemption is worded slightly differently than the exemption: In the preamble’s first sentence it is suggested that no other payments can be received, but the next sentence suggests that payments cannot be on top of (or “beyond”) the level fee (as opposed to offset against the level fee).

He goes on to explain that the first sentence says that the definition “excludes receipt … of commissions or other transaction-based payments,” and that while he says that seems clear enough (unless you want to argue that an offset effectively trumps the receipt), the next sentence refers to the receipt of “any other remunerations (e.g., commissions, 12b-1 fees, or revenue sharing), beyond the Level Fee.” While admitting that it is not entirely clear, Reish says that a reasonable interpretation is that if the additional payments are offset against the level fee on a dollar-for-dollar basis, the payment of those additional amounts is not “beyond the level fee.”

What To Do

So, what should an advisor do? Well, for those in what Reish describes as the “belt-and-suspenders crowd” — that is, very conservative advisers — the “ultra-safe” answer is to avoid all other payments or benefits, he says.

As for those willing to rely on a belt only, Reish concludes that a possible approach is, in the case where additional payments are received, to offset those additional payments on a dollar-for-dollar basis (or to pay them over into the IRA).

He concludes by cautioning that this is a legal issue — and that as a result, “advisers should not rely on general articles such as this one. Instead, you need to get individualized legal advice that applies to your particular circumstances and that quantifies the degree of risk, if any, that you are taking.”

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