More Thoughts on Distributions and Rollovers

Posted on April 1, 2016, by Fred Reish in DOL Activity, fiduciary, prohibited transaction. Comments Off on More Thoughts on Distributions and Rollovers

After my last post, I was asked another question about distributions and rollovers under the DOL’s proposed fiduciary regulation. Here’s the question and my answer:

Question: One thing I have heard is that all IRA Rollovers will fall under the DOL ERISA fiduciary standards with this rule.  Have you heard that?  Or, would all IRA Rollovers be covered under the new fiduciary definition, but not necessarily be ERISA covered?

Answer:  That’s generally correct, but it’s more complicated than that.

For ERISA tax-qualified plans, under the new rules a recommendation to take a distribution from a plan will be fiduciary advice subject to the prudent man rule and a duty of loyalty to the participant. And, the process must comply with the fiduciary prohibited transaction rules. That means that a fiduciary adviser can’t earn more from the rollover IRA than the adviser was earning from the participant’s account in the plan (unless the adviser satisfies a prohibited transaction exemption).

However, a recommendation to a participant to take a distribution from a government plan would not be subject to these requirements, since government plans are not governed by ERISA.

On the other hand, a recommendation to an IRA owner to transfer or withdraw money from an IRA is subject to rules similar to those for ERISA plans. That’s because a recommendation to withdraw or transfer IRA money is fiduciary advice under the Internal Revenue Code, and if the adviser benefits financially from that recommendation, the adviser must satisfy one of the exemptions. The relevant exemptions impose the Best Interest standard of care (which is a combination of ERISA’s prudent man rule and duty of loyalty).

These are major changes. Almost all advisers will need to change their practices to adapt to the new rules.


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