Warning: RIAs Could Get Snagged by Fiduciary Reproposal

By Brian Graff, Esq. • 5/8/2015 • 0 Comments
Registered investment advisors may be thinking that the Department of Labor’s proposed “conflict of interest” regulation doesn’t have an impact on them. After all, they are already fiduciaries acting in the best interest of their client. 

However, when it comes to retirement savings, there’s a new sheriff in town: the DOL. And the sheriff has proposed a rule that could effectively treat RIAs the same as broker-dealers, particularly in situations where an RIA is acting as a 401(k) plan advisor and also working with participants of that plan on rollover IRAs.
For example, assume that Participant X has been working with Plan Advisor A for more than 20 years, and is about to retire. The plan — as is currently the case with many defined contribution plans — does not offer systematic withdrawals. Participant X wants to work with Advisor A on a rollover because: (1) he trusts her; and (2) the plan does not offer him an effective way to manage his retirement income needs. 

Plan Advisor A operates as an ERISA fiduciary to the plan and receives a level fee of 30 basis points for those services. Advisor A is now proposing to charge Participant X a level fee of 75 basis points on the rollover IRA because as a standalone account, Participant X is going to require more comprehensive financial advisory services. 

A relative of Participant X has a casual friend who is an advisor — Advisor B — who is proposing to charge Participant X a level fee of 100 basis points on the rollover IRA. Both advisors are RIAs and will comply with a best-interest standard when providing advice to Participant X on his rollover IRA.

Under DOL’s proposed rule, if Advisor A wants to help Participant X, she will need to comply with the substantial requirements of the “best interest contract exemption.” This is because discussing the potential rollover with Participant X would now be a fiduciary act. And since Advisor A is going to be receiving a higher level of fees from the rollover IRA than she was as an advisor to the plan, it is a potential prohibited transaction. 

On the other hand, since Advisor B doesn’t have an existing relationship with Participant X, he can avoid complying with the best-interest contract exemption, and has no issues with a potential prohibited transaction. 

Hardly seems fair, does it?

How substantial are those best-interest contract exemption requirements? Well, first the RIA firm must notify DOL of the intention to rely on the exemption. After that initial notification, there are no less than five separate disclosure requirements embedded in the exemption, including:

  • disclosure of any material conflicts of interest, and notification of the right of investors to obtain complete fee information in the service contact;
  • a “point of sale” disclosure with an illustration of the total dollar cost of investing in the assets over 1-, 5- and 10-year periods (must project earnings to project actual fees);
  • an annual fee disclosure that lists the purchases/sales of each asset and its price, direct/indirect fees retirement investors pays from assets, and the total advisor compensation; 
  • maintaining a public website, updated quarterly, disclosing advisor fees for each asset that has been purchased, held or sold by any plan or IRA within the last year; and
  • keeping extensive data and other records for six years, which must be furnished to DOL upon request.
Are RIAs and their firms prepared to deal with the extensive requirements of the best interest contract exemption? Will the application of DOLs rules to RIAs serving as plan advisors have a chilling effect on their willingness to work with participants on rollovers — even if a rollover IRA is the only practical way for the participant to manage their money in retirement?

If the DOL rule is finalized in its current form, trusted plan advisors would be severely limited in their ability to serve participants after retirement if their IRA fees are higher than what they charge within the plan, despite having to provide those IRA clients with dramatically different services. Yet advisors who are not serving as plan fiduciaries and have no relationship with plan participants may freely offer rollover services, without regard to the level of fees they charge. 

So, for you RIAs that serve as plan advisors, you might want keep an eye on the new retirement savings sheriff in town.

Brian Graff is the Executive Director of NAPA.

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