Distribution and Rollover Education

A reporter recently asked me to explain why people are saying that, under the DOL’s fiduciary proposal, an adviser should not recommend that a participant take a distribution and roll over to an IRA, but instead should provide distribution education. Here’s my answer:

There are two issues.

The first is that the recommendation to take a distribution must be in the best interest of the participant. That is, it must be a prudent recommendation and it must be done with a duty of loyalty to the participant.  In order to make a prudent recommendation, the adviser needs to investigate the relevant factors that a knowledgeable person would want to know to make that decision.  Some of those factors are:  the investment expenses in the plan as opposed to those in an IRA; the costs for advice in the plan versus those in an IRA; the range of investment options in the plan versus those in an IRA, and whether a larger range of investments is advantageous to the participant; the flexibility and costs of withdrawals from the plan as compared to an IRA.  That requires quite a bit of investigation and analysis, but does not prohibit a recommendation.

The second is that, if the adviser makes more in the IRA than in the plan, it is a prohibited transaction. For example, if the adviser doesn’t make anything from the plan (that is, he isn’t the adviser for the plan), but will receive 1% per year for advising the IRA, it is clearly in the best interest of the adviser to recommend a rollover, but is it right for the participant?  The DOL says that is a conflict, and financial conflicts are prohibited unless there is an exemption.  But, there isn’t an exemption specifically on point.  And, while people think that the Best Interest Contract Exemption (BICE) is intended to apply, it isn’t clear what BICE requires in this situation.  So, until the final BIC exemption is issued, it isn’t clear how advisers will be able to avoid prohibited transactions if they make distribution recommendations.

However, if an adviser provides non-biased and good quality distribution education, that’s not considered a recommendation. As a result, the prohibited transaction rules don’t apply.

Note: These rules will also apply to recommendations to withdraw or transfer money from IRAs. It is not just a plan issue.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.