What does the extension of the fiduciary regulation’s applicability date mean for rollovers?
In a recent blog post, noted ERISA attorney Fred Reish discusses the impact of those changes on fiduciary status for recommendations to plan participants to take distributions and roll over to IRAs.
Reish explains that while the DOL extended the applicability date of the new fiduciary definition to June 9, it did not otherwise modify the definition, and that since the fiduciary rule defined a recommendation to take a plan distribution as fiduciary advice, any recommendation to take a distribution and rollover to an IRA on or after June 9 will be a fiduciary act.
As a result, Reish notes, an adviser will need to engage in a prudent process to develop and make such a recommendation. He explains that a recommendation to roll over is also a prohibited transaction, since the adviser will typically make more money if the participant rolls over than if the participant leaves the money in that plan, and therefore the adviser will need an exemption.
Reish concludes that, under the latest changes to the rules, an adviser in that situation will probably use a process which Reish refers to as a “transition BIC,” compliance with the “Impartial Conduct Standards” (that is, adhere to the best interest standard of care, receive no more than reasonable compensation, and make no materially misleading statements). Reish says this is basically a combination of the ERISA prudent man rule and duty of loyalty.
At that point, Reish turns his attention to what would constitute a prudent and best interest process in those circumstances, and concludes that any adviser making a distribution and rollover recommendation on or after June 9, 2017 must have a process for gathering and evaluating information about the investments, expenses and services in the participant’s plan and in the proposed IRA, and about the participant’s needs and circumstances.
