The Labor Department released Tuesday afternoon its fiduciary prohibited transaction exemption to align with the Securities and Exchange Commission’s Regulation Best Interest — a rule that industry officials say will have a significant impact on rollover recommendations and advice to IRAs.
Industry officials, however, anticipate that the Biden administration will pull back the rule and toughen it.
Labor “retained its proposed interpretation of fiduciary status for recommending rollovers,” explained Fred Reish, partner at Faegre Drinker in Los Angeles, in a Tuesday email to ThinkAdvisor.
“That is, if an advisor has a preexisting relationship of providing financial advice to the participant, even if it was for personal, and not plan assets, the advisor satisfies the ‘regular’ part of the give-part fiduciary definition” under the Employee Retirement Income Security Act, Reish said.
“If the advisor who recommends a rollover intends to give ongoing advice about how to invest the rollover IRA, that would satisfy the ‘regular’ part of the definition,” he added.
Considering the requirements of Reg BI and the Investment Adviser Interpretation, “that will in most cases mean that all five parts of the definition are satisfied and the advisor (and the supervisory entity, eg., broker-dealer or RIA) will be fiduciaries for purposes of evaluating and recommending the rollover,” the attorney said.
The recommendation, Reish stated, “has to be in the best interest of the participant, which is to say that it must be prudently made and loyal to the participant.”
After a quick review of the 295-page rule, IRA and tax specialist Ed Slott of Ed Slott and Co. added that the PTE is “generally following” Reg BI regarding rollover advice.
“The same standard would apply, meaning that advisors will have to show they have gone through a process when advising on rollover options and be able to document that analysis,” Slott explained Tuesday in an email to ThinkAdvisor.
“They can get paid for that advice but they must show they reviewed the benefits and drawbacks of each potential option and came up with recommendations that were in the client’s best interest,” he said.
Advisors, Slott continued, “need to be better educated on all facets of rollover options. It can’t just be ‘roll it over to an IRA with us’ without going through all the available options to see which is best. But they can get paid for this valuable service when they put in the time.”
Such a process is critical now, he added, as “we have seen massive layoffs and early retirements due to the fallout from the pandemic. Advisors have opportunities here to earn fees by helping clients with the big rollover decisions. Document everything! That’s clear in these rules.”
Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said in a statement that the exemption “is a step forward as it will encourage a variety of investment advice approaches and it will provide retirement investors with the services they seek.”