Extension of DOL Fiduciary Rule is Official and some Guidelines for Documenting Rollovers

Originally published by John C. Anjier.

The Department of Labor officially announced the 18-month extension of the effective date of the key, and most onerous provisions, of the DOL Fiduciary Rule (until July 1, 2019).[1]  The announcement was made on November 29, 2017.  This extension delays the implementation of the most problematic procedures of the DOL Fiduciary Rule, which had been previously set to take effect on January 1, 2018.  However, advisers should be aware that the portions of the DOL Fiduciary Rule, known as the “Impartial Conduct Standards,” are already effective.

The DOL Fiduciary Rule regulates advisers who advise clients on IRA accounts, including those who advise clients to roll over a 401k or to transfer an IRA account – a big source of business for many advisers.  The “Impartial Conduct Standards” went into effect on June 9, 2017.  The Impartial Conduct Standards, with regard to advice relating to client 401K or IRA accounts, generally require that a fiduciary,

• Make any recommendation in the best interest of the investor, meaning that it must be based on the investor’s investment objectives, risk tolerance, and financial circumstances (and not financial considerations of the fiduciary);
• Make no misleading statements about investment transactions, compensation, or conflicts of interest; and
• Charge no more than a reasonable amount for services.

For a rollover from an ERISA plan, the analysis to support the recommendation to roll over the 401k should include:

• Consideration of the retirement investor’s alternatives to a rollover, including leaving the money in the current employer’s plan, if permitted;
• Consideration of the fees and expenses associated with both the plan and the IRA;
• Whether the employer paid for some or all of the plan’s administrative expenses;
• The different levels of services and investments available under each option; and
• What investments are available under each option

For the transfer of an IRA, or in the case of a switch from a commission-based account to a level-fee arrangement, the adviser should document the reasons that the transfer is in the best interest of the client, including the services that will be provided for the fee.

To support this analysis, the adviser should obtain relevant information from the client such as:  the plan’s account statements, summary plan descriptions, and 402(f) Notice of Distribution Options.  A good summary of available plan information is provided in the DOL guide, “Maximize Your Retirement Savings –Tips on Using the Fee and Investment Information From Your Retirement Plan.”  If the client does not have these documents available, then the adviser may rely on publically available information such as the plan’s Form 5500 filings and Morningstar, SEC or similar reports.  The adviser can also use reliable benchmarks for typical fees and expenses for plans of the same type and size.

We also recommend in connection with any rollovers, that the adviser document the disclosure of any conflicts of interest and the analysis and documentation for any rollover be reviewed by the firm’s CCO.

The Impartial Conduct Standards analysis and supporting documentation is important, not only because it is required under the DOL rules, but these issues will likely arise in defending claims brought against the adviser.  The failure to obtain and to keep a record of the advice and supporting information could lead to liability.

[1] The DOL first unofficially disclosed the extension in a brief filed in a Minnesota lawsuit on August 9, 2017.

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