The U.S. Department of Labor has put off the effective date of its fiduciary rule, for now, but the rule is still out there. It could still come back. And, even the DOL rule does not come back in its current form, it could influence some other new standard that really does take effect.
Here, three financial services compliance specialists look at an important fiduciary rule topic: how the rule might affect rollovers.
One of the major targets of the new DOL fiduciary rule is rollover services.
Advisors can provide invaluable assistance to participants as the participants consider whether to roll over 401(k) and other qualified plan monies into individual retirement accounts once they leave their employers. However, these services are often rendered in the context of cross-selling, and cross-selling practices by their nature create potential conflicts of interest.
It is easy to see the potential abuse that could arise when a firm or business exploits the trust, which it has developed with a client through a longstanding relationship, to sell additional products and services at potentially unfavorable terms to the client.
(Related: LPL Schools Hybrid RIAs on Rollovers)
“Capturing” rollover assets is a classic example of cross-selling. In many instances, an advisor will have developed longstanding relationships with both the plan sponsor as well as the plan’s participants.
It would be tempting then, for the advisor to encourage the plan’s participants to roll over their account balances to IRAs as soon as they become eligible to take a distribution from the plan. This temptation arises whenever the advisor can earn a higher level of compensation providing rollover IRA services for the participant than the level of plan-related compensation that would otherwise be earned by the advisor if the participant’s assets had remained with the plan.
The U.S. Government Accountability Office has issued several well-publicized reports that investment management services provided to IRAs are highly lucrative and significantly more valuable to advisors than fees generated by employer plans.
The Rollover Opinion
To curb potential abuses associated with “capturing” rollovers, the DOL issued Advisory Opinion 2005-23A (the “Rollover Opinion”). On its face, this interpretive guidance broadly suggested that any rollover-related advice from an advisor providing any fiduciary advice to the plan sponsor or the plan’s participants could result in a prohibited transaction. On the other hand, an advisor who did not serve as a fiduciary could freely advise participants on rolling over their accounts to IRAs and how the rollover proceeds should be invested.