ASPPA ABC of the Greater Northwest - Capturing Rollovers, November 6th

For an advisor to be fiduciary, the advisor needs to recommend investments to a plan or a participant:Fiduciary Definition or participant... The DOL and IRA RolloversThe Department of La

Capturing Rollovers

FRED REISH, ESQ.

November 6, 2014

Why is this now the focus of attention?

With the aging of the baby boomers in a defined contribution world, the importance—and the amounts

—of retirement assets being rolled over to IRAs will be increasing dramatically

Rollovers of distributions are estimated to exceed

$2,000,000,000,000 over the next five years

For an advisor to be fiduciary, the advisor needs to recommend investments to a plan or a participant:

Fiduciary Definition

or participant.

If an advisor is a fiduciary for recommending investments

or investing, the advisor must:

Fiduciary Consequences

The DOL and IRA Rollovers

The Department of Labor’s 2005 guidance on

“capturing rollovers” from retirement plans was the first step in regulating advisory services for distributions and rollovers (DOL Advisory Opinion 2005-23A)

The DOL and IRA Rollovers

In addition, the GAO’s recent report: “401(k) PLANS: Labor and IRS Could Improve the Rollover Process for Participants,” has heightened the awareness of conflicts of interest in the rollover process and increased the likelihood of greater regulation of IRA rollovers

GAO Report on Rollovers

“Plan participants are often subject to biased information and aggressive marketing of IRAs when seeking assistance and information regarding what to do with their 401(k) plan savings when they separate or have separated from employment with a plan sponsor In many cases, such information and marketing come from plan service providers.”

continued

“ the opportunity for service providers to sell participants their own retail investment products and services, such as IRAs, may create an incentive for service providers to steer participants toward the purchase of such products and services even when they may not serve the participants’ best interests.”

GAO Report on Rollovers

continued

Continued

GAO Report on Rollovers

“Finally, some of the call center representatives did not mention the option of leaving funds in the old plan, 12 of 30 representatives raised doubts about the caller’s ability to roll over to a new 401(k) plan, and several emphasized the rollover assistance they provide.”

Continued

Distributions and Rollovers

“Rolling assets out of a plan is a broad area

that affects plan advisers, consultants,

participants and fiduciaries in 401(k) plans,

says Jerry Schlichter.”

PLANSPONSOR.COM, “New Mortality Tables Will Impact Pension

Plan Management,” July 3, 2014.

continued

Distributions and Rollovers

“‘If the plan sponsor provides access to

someone pushing IRA [individual retirement

account] products, that raises the question of

whether there is a fiduciary breach,’ he says

communications to participants with an eye out

for red flags.”

Continued

Note: Possible consequences

Impact on Non-Fiduciary Advisors

When advisors are not acting as fiduciaries to

they may capture IRA rollovers from plans, and may assist in the investment of those rollovers, without concern about ERISA’s fiduciary or prohibited transaction rules

However, FINRA has now issued guidance on the responsibilities of broker-dealers in their rollover practices

Firms monitor the suitability of registered representatives’

investor’s lifecycle where the impact of those

FINRA Report on Conflicts of Interest

If Rule 2111 is triggered, a registered representative must have a reasonable basis to believe that the

recommendation is suitable for the customer, based

on information about the options obtained through

such as tax implications, legal ramifications, and differences in services, fees and expenses between the retirement savings alternatives.

Suitability

The IRA Rollover Decision

A recommendation to roll over plan assets to an IRA

of which will depend on an investor’s individual needs and circumstances

FINRA Regulatory Notice 13-45

 Investment Options.

 Fees and Expenses.

 Services.

 Penalty-Free Withdrawals.

FINRA Regulatory Notice 13-45

 Protection from Creditors and Legal Judgments.

 Required Minimum Distributions

 Employer Stock

the list is not exhaustive

FINRA Regulatory Notice 13-45

In 2014, reviewing firm rollover practices will be an

comply with suitability standards in FINRA Rule 2111

[Emphasis added.]

Note: Also in SEC 2014 Examination Priorities.

FINRA Examination Priorities

FINRA Examination Priorities

In 2014, FINRA examiners will continue to focus on how

respect to suitability determinations as well as disclosures and communications

FINRA will also examine firms’ policies and procedures to identify and address situations where issues of diminished capacity may be present [Emphasis added.]

Legal Background—Fiduciary Advisor

In AO 2005-23A, the DOL said that, if an advisor was

roll over to an IRA;

could be subject to ERISA’s fiduciary responsibility

Legal Background

In effect, the DOL is taking the position that a fiduciary advisor—has such influence over participants’ thinking that the advisor has expanded its authority to encompass distributions, rollovers and IRA investing

While it is possible that, in an individual case, a fiduciary advisor could exercise undue influence over participant’s decision to take a distribution and roll into

an IRA with the advisor, that would be highly unusual

The preamble to the withdrawn fiduciary advice proposal states:

“The Department, therefore, is requesting

comment on whether and to what extent the final

regulation should define the provision of

investment advice to encompass

recommendations related to taking a plan

distribution .”

Capturing Rollovers

Compliance Steps for All Advisors

 Education on four alternatives: pros and cons

 Checklist for suitability discussion

 Disclosures of fees and expenses for advice

and IRAs

 Participant acknowledgment

Steps for Advisors

The descriptive materials concerning distributions could include discussions of the advantages and disadvantages of:

A conservative approach could provide written disclosures of fees and expenses for the IRA and its investments

These disclosures should be made prior to the participant making a decision about using the advisor

Note: Similar to 408(b)(2)

Steps for All Advisors

Steps for Advisors

Under a conservative approach, an advisor should obtain written acknowledgments that a participant made the decision to work with the advisor of his own free will and was not influenced by the advisor

That approach could also acknowledge that the participant made the decision to take a distribution—without influence from the advisor

The IRA Rollover: 10 Tips to Making a Sound Decision

The largest source of IRA contributions comes from individuals who move their money from their employer-sponsored retirement plans such as 401(k) and 403(b) plans when they leave a job, according to the Employee Benefit Research Institute.

If you are considering rolling over money from an employer plan into an IRA—or if you have been in contact with a financial professional to do so—follow these tips to decide whether an IRA rollover is right for you.

1. Evaluate your transfer options You generally have four choices You can usually keep some or all

your savings in your former employer's plan (check with your benefits office to see what the company's policy is) You can transfer assets to your new employer's plan, if allowed (again, check with the benefits or human resources office) You can roll over your plan assets into an IRA Or you can cash out your balance There are pros and cons to each, but cashing out your account is rarely a good idea for younger individuals If you are under age 59½, the IRS generally will consider your payout an early distribution, meaning you could owe a 10 percent early withdrawal penalty on top of federal and applicable state and local taxes.

.

Steps for Advisors

Issues that may attract DOL attention:

(and particularly in-service distributions).

assets over another (e.g., IRA rollovers over leaving

money in the plan).

or compensation of the advisor.

Steps for Advisors

Other considerations:

clients

management.

Questions?

CALIFORNIA | DELAWARE | ILLINOIS | NEW JERSEY NEW YORK | PENNSYLVANIA | WASHINGTON DC | WISCONSIN

FRED REISH, ESQ.

1800 Century Park East, Suite 1500

Los Angeles, CA 90067 (310) 203-4047 (310) 229-1285 [fax]

Fred.Reish@DBR.com www.linkedin.com/in/fredreish

www.drinkerbiddle.com

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