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Wednesday, April 14, 2021

Do I have to document best interest when doing rollovers?

How does the DOL Rule Affect Me?

Do I have to document best interest when doing rollovers?

Effective June 9, 2017, financial advisors who provide investment advice to retirement plan participants have to adhere to the Impartial Conduct Standard. The standard essentially stipulates the following:

  1. Best interest standard of care, which essentially combines ERISA’s prudent man rule and duty of loyalty
  2. Advisor cannot receive more than a reasonable compensation
  3. Advisor cannot make materially misleading statements

After June 9th everyone dealing with rollovers is effectively an ERISA fiduciary. As we have written numerous times, under ERISA there is private right of action. Therefore, even if the DOL does not enforce the rule right away, the fact that you have to comply with an Impartial Conduct Standard cannot be taken lightly. This goes for Registered Investment Advisors and Broker-Dealers. Let’s break down the requirements.

Consequences for RIAs: BICE & Best Interest Documentation

Many RIAs think that because they are already fiduciaries, the DOL Rule has little or no impact on them. Nothing can be further from truth. Under Securities Law, a recommendation to perform a rollover was not itself a fiduciary act nor did it carry the requirements and repercussions that it does after June 9th. Under the DOL Rule a level fee fiduciary who receives no commissions qualifies for a streamlined Best Interest Contract exemption (BICE). This means that a level fee fiduciary must provide investors with a written document stating the fiduciary status of the financial institution and advisor. The advisor must adhere to the Impartial Conduct Standard above. No special Best Interest Contract for commission-based compensation is needed.

However – and this is crucial – the DOL has imposed a requirement that a level fee fiduciary create a document addressing why a rollover (from an ERISA plan to an IRA or from an IRA to another IRA) is in the best interest of the investor. This requires consideration of investment alternatives to a rollover, complete analysis of fees and expenses of the plan, features of the plan, and different investments available under each option. The advisor’s services should be clearly explained in the document. (See more here.) Therefore, as a level fee fiduciary you are required to produce this document every time you accept IRA assets. If you do not, you are leaving yourself open to liability.

In our recent paper, we outline how our IRAFiduciaryOptimizer 2.0 has matched all these requirements in one report, which you can set up and complete in less than ten minutes.

Consequences for BD reps: BICE & Documentation

Many Broker-Dealer reps also believe that since they are not using the streamlined level fee exemption and are actually signing a Best Interest Contract, they do not have to document that the rollover is in the best interest of the investor. Here is what the DOL has said on the topic:

“Although the documentation requirement is only specifically recited in the level fee provisions of the BIC Exemption, the documented factors and considerations are integral to a prudent analysis of whether a rollover is appropriate. Accordingly, any fiduciary seeking to meet the best interest standard as set out in the exemption would engage in a prudent analysis of these factors and considerations before recommending that an investor roll over plan assets to an IRA or other investment, regardless of whether the fiduciary was a ‘level fee’ fiduciary or a fiduciary complying with the full BIC Exemption.”

Therefore, even if you are not a level fee fiduciary, you must consider those same factors as part of a prudent process (see #1, above, regarding Prudent Man Rule). But prudent process under ERISA needs to be documented, so this is essentially the same requirement to document why a decision is in the best interest of the investor.

What this means for you

Every advisor who does rollovers – 401(k) to IRA or IRA to IRA – must follow prudent process and consider all factors to determine if a rollover is indeed in the best interest of the investor. Level fee fiduciaries are explicitly required to create documentation for best interest reasoning, while non-level fee fiduciaries still have to follow the same prudent process, which, under ERISA, does have to be documented!



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