4 Things for Fiduciaries to Consider With IRA Rollovers

New Pershing white paper tackles complicated proposed actions by DOL, SEC on the question of fiduciary duty

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  • Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communications—to clients, from clients, and about client accounts.  To comply with fiduciary obligations, communications must be thorough and not mislead.
  • RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients’ privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.

How do advisors make sense of proposed DOL regulations as they apply to fiduciary duty and specifically their potential impact on how advisors manage IRA rollovers?

Not an easy question, but one Pershing attempts to answer in a white paper released Tuesday.

The white paper, "Navigating the Evolving Regulatory Landscape in Pursuit of Rollovers," written by ERISA attorney and retirement plan expert Fred Reish, provides insight into the anticipated regulatory changes that will modify the definition of a fiduciary. Pershing said it released the white paper “to help guide advisors on how they can accommodate these rules" as they apply to IRA rollovers "and continue to deliver services to their clients.”

Robert Cirrotti, director of retirement solutions at Pershing, said there were three drivers behind the release of the paper.

“The first is the ongoing regulatory discussion and pondering of fiduciary, and the potential DOL and SEC activity on the subject,” Cirrotti said. “The second driver is the fact that 40% of advisors do some type of retirement planning. It’s a relevant issue, and IRA rollovers will be the largest source of net new money to money management in coming years. In fact, McKinsey estimates that rollovers are expected to drive 40% to 50% of net new money for wealth managers through 2015.”

The third driver, he said, was a continuation of the conversation begun with “clients” (Pershing-affiliated advisors) at this year’s annual Pershing Insite conference in Hollywood, Fla., in June.

“It surrounds the discussion of retirement as a share of wallet. Retirement plans are the No. 1 source of savings for individuals, so the opportunity is huge.”

Just how huge?

The paper, citing ICI research, notes that at the end of the first quarter, IRA assets totaled $5.7 trillion and accounted for 27% of U.S. retirement assets. This figure is up $300 billion from just three months earlier, with rollovers from employer-sponsored retirement plans driving much of that growth.

For that reason, IRA rollovers are a critical client need as well as an important part of the advisory business. As baby boomers retire, advisors will need to help manage the transition of “billions of dollars from retirement plans into rollover IRAs.”  At the same time, he added, retirement plan distributions and IRA rollovers are becoming more regulated by the Department of Labor, which will require advisors to be knowledgeable about the regulatory changes to come.

As the DOL works on regulation to expand the definition of fiduciary advice, more advisors could be subject to ERISA regulation. According to the paper, advisors who are not fiduciaries can help participants with distributions and rollovers. For those who are fiduciaries, or who become fiduciaries under the expanded definition, the DOL interpretations mean that advisors should consider a prudent approach for assisting clients with rollovers, including:

  • Clearly defining the fiduciary services provided to a plan so as not to include rollovers
  • Ensuring that the decision to take a distribution and to roll over an IRA is the participant’s decision
  • Offering clients unbiased educational materials regarding distribution alternatives and rollover services
  • Providing written disclosure of fees and expenses for the IRA and its investments, as well as the advisor’s compensation

If regulations change to expand the fiduciary definition, it will focus more attention on an advisor’s fiduciary status with regard to a plan or participant, the paper notes. Because it is not possible to predict what the rules will be once they are finalized, it argues that advisors should always consider their current practices based on the current regulatory environment until pending changes are clear.

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Check out Senate Banking Aide: Committee Has ‘No Interest’ in Bill to Block Fiduciary Rules on ThinkAdvisor.

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