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Does Fiduciary Coverage for 401(k) Rollovers Lie Ahead?

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A just-released report by the Government Accountability Office on rollovers foreshadows what one of the more controversial aspects of the Department of Labor’s revised fiduciary rule may look like, industry officials say. 

In its 76-page report, “401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants,” GAO urges the DOL and the Internal Revenue Service to take steps to ensure that plan-to-plan rollovers are more efficient, and to provide more information to plan participants about their distribution options when leaving an employer’s plan, as GAO says the current rollover process favors distributions to individual retirement accounts.

GAO said in its report that DOL and IRS should reduce the waiting period to roll over into a 401(k) plan and improve the asset verification process, as such actions could help make staying in a 401(k) plan “a more viable option, allowing participants to make distribution decisions based on their financial circumstances rather than on convenience.”

Arguing that little attention has been paid to the distribution process, GAO said it went about identifying challenges separating plan participants may face in (1) implementing rollovers; (2) obtaining clear information about which option to choose; and (3) understanding distribution options.

Said GAO: “Labor regulations do not ensure that 401(k) plans provide complete and timely information to participants on all their distribution options.”

In its report, GAO urged both agencies to reduce the “obstacles and disincentives” that exist for rolling into another plan, and told DOL to ensure that participants receive “complete and timely information, including enhanced disclosures, about the distribution options” for their 401(k) plan savings when separating from an employer.

Phyllis Borzi, assistant secretary for DOL’s Employee Benefits Security Administration, told AdvisorOne Wednesday that the GAO report “highlights that ending conflicts of interest among advisors in the retirement marketplace is an important part of helping workers save for a secure retirement, particularly when they are faced with the decision about making a rollover or taking some other form of distribution.”

In its report, GAO specifically urges EBSA to finalize the agency’s proposed rule amending the definition of fiduciary under ERISA, and “require plan service providers, when assisting participants with distribution options, to disclose any financial interests they may have in the outcome of those decisions in a clear, consistent, and prominent manner; the conditions under which they are subject to any regulatory standards (such as ERISA fiduciary standards, SEC standards, or others) and what those standards mean for the participant.” But Brad Campbell, former head of EBSA who’s now with Drinker Biddle & Reath in Washington, has warned that EBSA’s revised fiduciary rule—likely to be out in July—will also include new rules on the rollover solicitation process. “I suspect that [EBSA will say] a conversation about a rollover is a fiduciary conversation,” Campbell has said. If this is part of the revised rule, “that would present a lot of real difficulties and changes for rollovers.”

Indeed, Kent Mason, a partner at the law firm Davis & Harman, told AdvisorOne on Wednesday that while filling disclosure gaps for participants is a good thing, “if you attach fiduciary duty to the distribution of that information” as DOL likely will do in requiring rollovers be held to a fiduciary standard in its reproposed fiduciary rule, “that information will dry up, a point that GAO itself generally makes.”

Fred Reish, partner and chairman of the financial services ERISA team at Drinker Biddle & Reath, told AdvisorOne that GAO, in its report, is encouraging DOL to provide guidance that service providers must make certain disclosures “in the context of the fiduciary advice regulation that the DOL is working on now.” But GAO is also saying that DOL “should give clear guidance to plan sponsors and fiduciaries about how far they can go in providing distribution information and education without becoming a fiduciary advisor for those purposes. Fiduciaries must already administer a plan prudently, and distributions are a part of that.”

As to the GAO recommending disclosure by service providers in the distribution process, “it appears that [GAO] is giving a green light and some guidance on what [it] would like to see in the fiduciary regulation,” Reish says.

David Bellaire, executive vice president and general counsel for the Financial Services Institute, says however, that “It is evident that the GAO has not fully considered the impact the Department of Labor’s fiduciary rulemaking will have on Main Street Americans’ access to professional financial advice, products and services.” While FSI supports disclosure of costs and conflicts, “we believe this should be done in a way that ensures the quality of advice investors receive when planning for retirement, but does not limit it.”


Read The Disclosure Paradox: How Much Information Is Too Much? by Michael Finke on AdvisorOne.