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Reish: What Does Recommending a Rollover Require?

The Department of Labor’s fiduciary regulation provides that a recommendation to take a distribution from a plan, and to roll the money over to an IRA, is a fiduciary act. But what are the relevant factors for evaluating whether a participant should take a distribution?

In a recent blog post, noted ERISA attorney Fred Reish reminds that as a fiduciary act, the recommendation must be prudent and cannot result in a prohibited transaction. However, he explains that a prohibited transaction almost automatically occurs, since an adviser typically makes higher fees in the IRA than from the plan (even where the adviser is providing services to the plan). As a result, an exemption is needed, even if the recommendation is otherwise prudent.

That’s where the Level Fee Fiduciary provision of the Best Interest Contract Exemption (BICE) provides the framework for qualifying for an exemption.

Reish notes that the general rule for the prudence of recommending a rollover (as opposed to the prohibited transaction issues) is that a fiduciary adviser engage in a prudent process. But that raises the question, “What does an adviser need to do in order to establish that it is an ‘informed’ and ‘reasoned’ recommendation?”

Reish notes that a recommendation is “informed” if the adviser has gathered and evaluated the information that a knowledgeable person would consider to be relevant to the issue. A reasoned decision is one that bears a reasonable relationship to the information that was evaluated.

So what are the relevant factors?

In BICE, the DOL identifies three specific types of relevant information about the retirement plan: the investments in the plan, the services provided by the plan, and the expenses in the plan. Reish notes that examples of other relevant matters are whether the plan permits periodic distributions without charge, and whether the participant is invested in company stock in the plan (particularly if the participant has a low basis in the company stock compared to its current value).

Where the adviser already provides services to a plan, Reish explains that it should be relatively easy to gather the information, but if not, the adviser would need to make a diligent effort to gather that information. That would include things like:

  • the plan’s 404a-5 disclosures (which are also known as participant disclosures and/or the Investment Comparative Chart);

  • the most recent quarterly statement, which should reflect any expenses being charged against the participant’s account, as well as how the participant is invested and the account balance; and

  • information that may be available on the plan’s website.

Additionally, Reish notes that an advisor also needs to obtain information about plan services, things like whether the plan offers a brokerage account option or non-discretionary investment advice services.

The key to the analysis and the development of a prudent recommendation is to focus on the best interest of the participant. Reish closes by reminding the reader that BICE requires that the adviser document why the recommendation is in the best interest of the investor.