The DOL Fiduciary Rule. Questions & answers by Fred Reish. Retirement Plan Solutions. Content provided by. Compliments of

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1 Retirement Plan Solutions Content provided by The DOL Fiduciary Rule by Fred Reish Compliments of The law and analysis contained in these questions and answers are current as of June 2016, are general in nature and do not constitute a legal opinion that may be relied on by third parties. Readers should consult their own legal counsel for information on how these issues apply to their individual circumstances and to determine if there have been any relevant developments since the date of these materials.

2 Why is TD Ameritrade Institutional making this information available to you? At TD Ameritrade Institutional we are committed to helping advisors be successful. We continually look for ways to bring thought leadership and best practices ideas to you in order to support your business growth and success. We know how hard you work, and that sometimes it can be difficult to navigate some of the complexities in your business. That s why we have asked retirement industry experts that you recognize as thought-leaders to provide information on topics that impact your practice. Although the information included in this document isn t tailored to the circumstances of a particular advisor, we hope you find it educational, informative and that it will help you identify opportunities in your business. On Thursday, April 28, 2016, TD Ameritrade Institutional hosted a webcast presentation by Fred Reish of the law firm Drinker Biddle & Reath, LLP titled Understanding the DOL s Fiduciary Guidance and Rollovers to IRAs. A replay of that webinar can be accessed here: After the presentation a number of attendees had follow-up questions for the presenter. Mr. Reish has compiled those questions, and his answers, below. Who is providing this information? This information was created by Fred Reish of the law firm Drinker Biddle & Reath to be provided to TD Ameritrade Institutional advisors. Drinker Biddle & Reath is a 620-attorney firm with 12 offices nationwide. Mr. Reish is a member of the firm s Employee benefits and Executive Compensation practice Group, Chair of the Financial Services ERISA Team and Chair of the Retirement Income Team. His practice focuses on fiduciary issues, prohibited transactions, tax-qualification and retirement income. TD Ameritrade Institutional is not affiliated with Drinker Biddle & Reath. While TD Ameritrade Institutional is pleased to make this information available to you, neither TD Ameritrade Institutional nor any of its affiliates is responsible for this content. How should you use this information? Drinker Biddle & Reath intends for this information to provide a general overview about the topics covered and to help answer some general questions about the new Department of Labor (DOL) rule. Because neither Drinker Biddle & Reath nor TD Ameritrade Institutional is providing this information as legal advice tailored to your specific circumstance, this information is not intended to be relied upon as such. You are urged to consult with attorneys or compliance experts that understand your particular circumstances before utilizing any of the ideas or information presented here in your practice. TD Ameritrade Institutional 2

3 1 Are you considered a level fee advisor if you charge tiered rates or different flat rates for different clients? Yes. There is no prohibition on charging different fee levels to different clients. The legal concept is that an adviser s fees cannot exceed reasonable compensation for the services rendered. And, as a practical matter, for any given scenario, there is a range of reasonableness for fees. For example (and as a hypothetical), a range of fees for advisory services for a $1,000,000 IRA could be from a low of.75% to a high of 1.25%. (This example is not a statement that those rates are reasonable. The determination of reasonableness is based on market data for similar services under similar circumstances.) Using my hypothetical, if an adviser provided services that are typical and customary for a $1,000,000 account, then the adviser s compensation would be reasonable if it was anywhere within that range (that is, from 75 basis points to 125 basis points per year). Within that context, an adviser could charge a $1,000,000 IRA owner 75 basis points and charge another IRA owner a fee of 125 basis points. In both cases, the fees would be reasonable, since neither of them exceeded a reasonable amount (and there is not a requirement that an adviser charge the same amount to all similarly situated clients). In addition, the requirement is that the fee be reasonable for the services provided. If one client s portfolio needs are more complex, or if the client wants or needs more of an adviser s time, the fees for that client could reasonably be higher. To be fair, an adviser may need to justify the more expensive fee as being reasonable. In order to do that, the adviser should have good market data supporting the fee (for example, a benchmarking report). With regard to the other question, the use of tiered rates is not a prohibited transaction so long as the amounts are reasonable. If a particular tiered rate is customary in the industry for accounts of a certain size (and with certain services), then the adviser s compensation can be structured in that manner. The arrangement does not violate the prohibited transaction rules. In that regard, there are two prohibited transactions in ERISA and in the Internal Revenue Code. The first is that an adviser cannot use his or her fiduciary authority to increase the adviser s compensation. Since the fees were negotiated with the client, and since no particular recommendation would increase the compensation of the adviser beyond the fee scale, it would not be a prohibited transaction under that provision. The second transaction that is prohibited is a use of fiduciary authority to cause the adviser to receive a payment from a third party (such as a mutual fund 12b-1 fee or an insurance commission). However, in this scenario, the adviser would just receive the tiered fees and would not receive any additional compensation from third parties. As a result, there is not a prohibited transaction under that rule either. 1 By Fred Reish 3

4 2 Do the new rules cover all IRA and Roth IRA accounts, or just IRA rollovers from qualified plans? The new rules, when effective on April 10, 2017, will cover the following IRA scenarios: 2 Investment advice to all IRAs, including contributory IRAs, Roth IRAs and rollover IRAs. Recommendations of distributions from qualified plans and rollovers to IRAs with the adviser. Recommendations to transfer IRAs from another adviser to the recommending adviser. (Note that other types of investment advice, for example, to plans and participants, would also be covered.) Generally speaking, any such recommendation would need to be in the best interest of the investor. Simply stated, the best interest standard requires that the adviser make a prudent recommendation taking into account the relevant factors and that the adviser act with the duty of loyalty to the participant or IRA owner. (The relevant factors are those that a person who is knowledgeable about the issues would consider. There is a fiduciary duty to investigate and evaluate these factors.) The only exception is where a fiduciary adviser is recommending investments to an IRA and where the adviser has a pure level fee (that is, where no prohibited transactions are being committed, e.g., no additional or third party money or financial benefits). In that case, there is not a prohibited transaction. As a result, the adviser will not need an exemption from the prohibited transaction rules such as the Best Interest Contract Exemption (BICE) and, therefore, the adviser will not need to agree to adhere to the Best Interest standard of care. Instead, the fiduciary adviser will be subject to only the fiduciary rules under the securities laws. In other words, a fiduciary adviser will need to either avoid prohibited transactions or to obtain the relief of a prohibited transaction exemption. Any recommendation of a transfer of an IRA, or of a distribution of a rollover from a plan, will be viewed as a prohibited transaction by the Department of Labor (with the exception of the unusual situation where the adviser will make the same compensation in the IRA as the adviser did in the plan). That is because, if the IRA owner or participant does not work with the recommending adviser, the adviser will not receive any compensation, but if the IRA owner or participant agrees to have their IRA managed by the adviser, the adviser will receive compensation. In other words, the conflict of interest is the difference between earning nothing and earning something. Because of that conflict, the fiduciary adviser will need to satisfy the requirements of a prohibited transaction exemption, most likely BICE. By Fred Reish 4

5 3 The new rules require that compensation be reasonable. How do you determine if compensation is reasonable? The Department of Labor states in the preambles that the determination of reasonableness of compensation is based on market data. In other words, what is a common and reasonable charge for a particular set of services? As a result, advisers will need to obtain information about market pricing for their services. In that regard, the pricing may vary depending on the nature and quantity of the services offered by the adviser. For example, discretionary investment management may justify higher compensation than non-discretionary investment advice. As another example, the management of portfolios of mutual funds may justify less compensation than the management of portfolios of individual securities. Regular meetings with IRA owners concerning their investments and other possible services, such as retirement income planning, sustainable retirement income, and so on, may justify higher compensation. Since the reasonableness of compensation is based on the services provided to the retirement investor (and the market costs for those services), the more detailed the benchmarking information, the more precisely the adviser can determine the reasonableness of his or her compensation. In addition, advisers should periodically monitor market data (or benchmarking reports) in order to determine if the pricing for their services continues to be reasonable. 3 By Fred Reish 5

6 4 In recommending a mutual fund, does an adviser have to consider a lower cost share class with a transaction fee versus one with no transaction fee, but with a 12b-1 fee? Yes, but with some explanation. 4 In evaluating these types of issues, advisers need to consider the best interests of the investors, for example, the IRA owners. That would be part of a prudent process for developing a recommendation for the investor to engage in the particular course of conduct. If the IRA owner is a long-term investor, it is possible that it would be less expensive to invest in a transaction-fee share class, even though that incurred an initial cost. On the other hand, if the account were more actively traded, then it might be preferable from a cost perspective to invest in NTF funds. Fiduciary advisers will need to do that type of analysis and make a recommendation that best meets the needs and circumstances of the IRA investor. Documentation of that analysis should be maintained in a due diligence file. Of course, it s possible that a particular IRA investor will prefer one alternative to the other. In that case, a fiduciary adviser should educate the IRA investor on the pros and cons of the alternatives, and then the IRA investor can make the decision. But, as a word of warning, if it turns out that the IRA investor s decision is materially more expensive, the question could arise as to whether the adviser s explanation of the considerations was adequate. By Fred Reish 6

7 5 What changes will need to be made by fee only RIAs for working with plan participants on plan distributions and rollovers to IRAs? If the adviser is a level fee fiduciary, the adviser can use a simplified version of the Best Interest Contract Exemption. (BICE defines level fee fiduciary as a fiduciary adviser whose only compensation is a level fee. But, it needs to be level for the adviser, the adviser s supervisory entity, and all affiliates and related entities and persons. In other words, neither the adviser nor any of those other persons or entities can receive any money or financial benefits beyond the level fee.) If a fiduciary adviser is a level fee fiduciary, the special exemption in BICE requires only the following: A written notice, no later than point of sale, that the adviser and the adviser s supervisory entity are fiduciaries. (For example, the notice could say that the IAR and the RIA firm are acting as fiduciaries for the recommendation.) The RIA firm must affirmatively state that it and the adviser will comply with the impartial conduct standards. Those include: Acting in the best interest of the retirement investor. Receiving no more than reasonable compensation for their services. No materially misleading statements about a recommended transaction, fees and compensation, material conflicts of interest, or any other relevant matters. In the case of a recommendation to roll over from an ERISA plan to an IRA, the RIA firm must document the specific reasons why the recommendation was considered to be in the best interest of the retirement investor. That must include consideration of the retirement investor s other alternatives (such as leaving the money in the plan). The analysis also must include the fees and expenses in the plan and the IRA (including expenses for investments, fees for advice and costs of administration), the different levels of service and the range of investments available in the plan in the IRA. In the case of a recommendation to roll over or transfer from another IRA, the RIA firm must document the reasons why the arrangement is considered to be in the best interest of the retirement investor, which includes specifically a consideration of the services that would be provided for the fee. 5 By Fred Reish 7

8 6 Do the rules on helping participants with rollovers apply (1) if the adviser is advising/managing on a participant s account, (2) if the adviser is advising a plan that the participant is in, or (3) if the adviser doesn t have any relationship with the participant or plan? The new rules will apply to any recommendation to take a distribution from a plan and roll over to an IRA with the adviser. That includes plans for which the adviser is not providing any services, plans for which the adviser is providing non-fiduciary services, and plans for which the adviser is providing fiduciary services. There is no legal distinction among those scenarios. The DOL s position is that a recommendation to take a distribution is, in and of itself, a fiduciary recommendation, and needs to be done prudently and in the best interest of the investor. As a result, where circumstances dictate, a fiduciary adviser will need to recommend to a participant that he leave the money in a plan. The duty of loyalty to the participant would require that. In most of those cases, a recommendation could also result in a prohibited transaction, because the adviser will earn more from advising an IRA than the adviser was making from the plan, which in some cases would be nothing (e.g., where the adviser was not providing any services to the plan). However, where an adviser is managing a participant s account, it s possible, and sometimes actually happens, that the adviser s fees for working with the IRA would be the same as his fees for managing the participant s account. In that case, there isn t a prohibited transaction, because the adviser is not giving conflicted advice (that is, the adviser s compensation would be the same in both places). Nonetheless, the recommendation still needs to be prudent, which could take into account other factors, such as the expenses of the investments in the plan versus those in the IRA. 6 By Fred Reish 8

9 7 Will level fee advisers to plans and IRAs need to have a Best Interest Contract? No. 7 A level fee adviser will not be committing a prohibited transaction and, therefore, will not need an exemption. As a result, the adviser will not need to enter into a Best Interest contract with the plan. However, the adviser will be a fiduciary under ERISA and will be subject to the prudent man standard of care and the duty of loyalty in ERISA. Note that, even if an adviser to a plan was committing a prohibited transaction that could be cured by BICE, a contract would not be required. Instead, BICE requires a Best Interest disclosure statement for plans that contain the same provisions as the Best Interest Contract Exemption. With regard to advice to IRAs, the outcome is different. If a fiduciary adviser is giving level fee advice to an IRA, the adviser will not be committing a prohibited transaction. As a result, the adviser will not need the benefit of an exemption and will not be required to agree to adhere to the Best Interest standard of care. However, there is not an ERISA fiduciary standard of care for IRAs (unless an adviser contractually agrees to it). Since no contractual agreement is required for a level fee adviser, the adviser s standard of care will be under the securities laws (that is, it will be the standard of care that RIAs have lived with for many years now). Note that the phrase level fee adviser refers to an arrangement where the fees of the adviser, the adviser s supervisory entity, and all affiliated and related entities and persons, are level. And, by level, I mean that the adviser is not receiving payments or benefits from third parties directly or indirectly related to the advice, and that the adviser cannot increase his compensation (or that of his supervisory entity or any related or affiliated parties). By Fred Reish 9

10 8 Will advisers who are reps of broker dealers need to have a Best Interest Contract? If so, who will prepare it? As background, the Best Interest contract will only be needed where an adviser enters into an arrangement with an IRA and the arrangement involves a financial conflict of interest (or, in other words, a prohibited transaction). That means, for example, that Best Interest contracts will not be needed for investment advice to plans and participants. In those cases, there will be a Best Interest disclosure document, but not a contract. Also, for advisory arrangements with IRAs that do not involve conflicts of interest, there is not a requirement for a Best Interest contract. For example, where an adviser provides level advice for a fee (e.g., 1% per year), and neither the adviser nor its supervisory entity (e.g., a broker-dealer) nor any affiliated or related entities, receive any additional compensation, there will not be a need for a Best Interest contract, because there is not a prohibited transaction. So, let s focus on situations where an adviser to an IRA gives fiduciary investment advice that results in a prohibited transaction. That can occur in a variety of ways. Here are two examples: It is a prohibited transaction to receive a payment from a third party that relates to the IRA assets. So, for example, if an adviser recommends an individual variable annuity contract, the adviser and his or her broker-dealer will receive a payment from an insurance company (that is, from a third party). As a result of the prohibited transaction, a Best Interest contract is needed. It is also a prohibited transaction to make an investment or insurance recommendation that results in the payment of compensation to an adviser beyond the adviser s level fee. So, for example, if an adviser recommends a mutual fund, and the broker-dealer receives a 12b-1 fee that is shared with the adviser, it is a prohibited transaction. Again, a Best Interest contract will be needed. (However, if there is an agreement with the plan fiduciaries or IRA owner that any such payments will be dollar-for-dollar offset against the compensation of the adviser and the adviser s supervisory entity and affiliates and related parties, and the payments are in fact offset, it is treated as level compensation.) The Best Interest contract is entered into between the financial institution and the retirement investor. In other words, the adviser is not a party to the Best Interest contract. Under the facts of this question, the financial institution would be the adviser s broker-dealer. As a result, the contracts will be prepared by broker-dealers (but probably delivered by advisers). 8 By Fred Reish 10

11 9 Do insurance commissions count when determining whether an adviser is a pure level fee fiduciary? Yes. The prohibited transactions do not vary depending on the classification of payments as commissions, revenue sharing, 12b-1 fees, etc. Instead, the question is whether the adviser, the adviser s supervisory entity (e.g., a broker-dealer) or any affiliated or related party receives any money or things of monetary value. The label put on those payments is irrelevant. Accordingly, any payment above and beyond the agreed-upon fee would constitute a prohibited transaction. However, a prohibited transaction can be cured by an offset. In other words, if the advisory agreement provides that all payments to the adviser (and to the adviser s supervisory entity, affiliates and related parties) will be offset against the advisory fee and, in fact, those payments are offset, there is not a prohibited transaction. That is because the adviser and the related parties receive nothing other than the agreed-upon level fee Is it still a level fee if fixed income fees are 25 bps and equity fees are 100 bps? Probably not. 10 There is nothing inherently wrong with charging 25 basis points for managing fixed income assets and a higher fee for managing equity investments. But, there is a financial conflict of interest if the adviser is also determining the asset allocation. That is because, if the adviser recommends a higher allocation to equities, then the adviser is effectively recommending an investment program that pays more money to the adviser. Since the adviser will have used his fiduciary authority to recommend an investment program that pays him or her more money, it is a prohibited transaction. As a result, fiduciary advisers should consider a blended fee arrangement which would, at the beginning, take into account the anticipated allocation of the assets. In that way, the adviser would charge the same fee across all investment recommendations or decisions, and would avoid engaging in prohibited transactions. By Fred Reish 11

12 11 In regards to levelizing compensation, if two IARs under the same RIA charge different fees for discretionary accounts, is that permitted under the new rule? In many circumstances, yes. The rules require that the compensation of an adviser (including the adviser s supervisory entity, e.g., the RIA) be no more than reasonable. Reasonable compensation is generally defined as the amount that would be charged in the open market place for comparable services. Since there is a range of competitive fees that can be charged for similar services by comparable advisers, the evaluation of a reasonable fee is not based on a specific dollar amount, but instead on the range of fees that is commonly charged under the circumstances. Thus, for example, if investment advisers across the country most often charge between 1% and 1.25% per year for managing a $1,000,000 account, that would be the range of reasonableness. In other words, if one adviser charged 1% and another charged 1.25%, both could be reasonable, since neither is charging a fee in excess of a reasonable amount. Of course, where both of the advisers work for the same firm, it would raise the question of whether both fees were reasonable. But, if supported with credible marketplace data, the legal answer is that neither fee is a prohibited transaction, since neither exceeds a reasonable amount If I am advising on a participant s account for 100 bps and I recommend a distribution and IRA rollover where I will also charge 100 bps, do I have a conflict/prohibited transaction? No. Since your recommendation will not cause yourself (or your supervisory entity or any affiliates or related parties) to receive compensation above and beyond the 100 basis point fee, there is not a financial conflict of interest and there is not a prohibited transaction. However, that does not free an adviser from the responsibility to make a prudent recommendation. In other words, the adviser would need to evaluate the investments, expenses, and services in the plan, and compare those to what s available in an IRA, and make a prudent recommendation. A number of factors could suggest that a participant might be better off leaving the investments in the plan. Some of those factors are: investments in company stock; extraordinary low expenses for the investments; and the minimum required distribution rules (e.g., there are circumstances where minimum distributions would be required from an IRA, but not from a plan). But, there are also factors which could favor a rollover to an IRA; for example, enhanced services from an adviser; distribution flexibility; lifetime income guarantees. 12 By Fred Reish 12

13 13 If we recommend transferring an IRA portfolio from a 12b-1 trail situation to a fee based account, do we have a conflict/prohibited transaction? Perhaps. In any event, the recommendation needs to be prudent and in the best interest of the retirement investor. 13 The DOL has highlighted this issue as one for close scrutiny because of the possibility of reverse churning. That is, the DOL is concerned that, if money is in a transaction-based account and there are only a few transactions, an adviser could be recommending a feebased account in order to increase his compensation in a manner which favors the adviser, but not the investor. Under the facts of this question, for example, if the IRA investor was charged a front-end load on the mutual fund investments (and the adviser received a portion of that as a commission), any recommendation to move from, e.g., a 25 basis point trail to an advised account with a 100 or 150 basis point advisory fee would be closely scrutinized. As a result, advisers should be careful in recommending and documenting those transactions, unless the fee-based account will clearly be less expensive than the transaction-based account going forward. (That s not to say that there can t be other justifications. However, it is to say that the recommendation and its consequences will be closely scrutinized.) If the compensation to the adviser in the fee-based account is lower than it was in the transaction-based account, there is an argument that the recommendation did not result in a prohibited transaction. However, it s possible that the DOL (and perhaps claimant s and plaintiff s attorneys) would take the position that a certain annual fee is more valuable to an adviser than the possibility of a transaction-based fee. They would then use that to assert that the adviser improved his financial position and, therefore, committed a prohibited transaction. As a result, it would be the safest to assume that such a recommendation is a prohibited transaction and to comply with the provisions of the Best Interest Contract Exemption. By Fred Reish 13

14 14 We offer custom model portfolios to our plans. Are these now considered fiduciary advice to the participants? It depends. 14 It is possible, under the final rule, to use asset allocation models as participant investment education. Properly done, it would not be a fiduciary activity for an adviser to develop those models and, with approval of the plan fiduciaries, to use them for participant investment education. Some of the requirements are that the models only use the plan s designated investment alternatives, the primary plan fiduciaries review and monitor the models, and the investment education materials describe the plan s other investments in each of the relevant investment categories. On the other hand, if an adviser keeps control over the models, they would be viewed as managed accounts, which would involve fiduciary activity. That can include discretionary re-balancing, the removal and replacement of investment options within the models, changes in asset allocation within the model, and so on. If an adviser reserves the right to make those changes to itself, the adviser will be a discretionary investment manager. 15 How will the new rule affect a level fee adviser s relationship (e.g., disclosures, services, fees) to existing IRAs, e.g., money that was rollover from retirement plans prior to the applicability date? If the adviser is a pure level fee adviser* (and as a result, there are not any prohibited transactions), these rules will not apply to fiduciary advice to IRAs, even though the IRAs originated from pre-rule rollovers. On the other hand, if the adviser (or his supervisory entity, or any related or affiliated party) receives any compensation in addition to the stated advisory fee, that would be a prohibited transaction. In that case, the advisers (and the supervisory entity, e.g., RIA firm or brokerdealer) would need to comply with a prohibited transaction exemption as soon as the new rule applied to them. Note that there are transition and grandfathering rules which could ease the burden of compliance. 15 By Fred Reish 14

15 16 Is it important what the all in fees and costs are? Or is it just my compensation when I recommend a plan distribution/rollover or recommend a transfer of an IRA? It s more complicated than that. 16 The fees and costs (among other factors) are to be reviewed on a comparative basis, taking into account the needs and circumstances of the investor and the impact of the different kinds of fees and costs. For example, plans and IRAs typically have three types of costs. Those are: costs of investments (e.g., the expense ratio of mutual funds); costs of advice (e.g., 12b-1 fees or advisory fees); and administrative fees (which are usually quite small in IRAs, and which may or may not be paid entirely by revenue sharing or by sponsors for plans). In order to make a recommendation, an adviser needs to investigate those costs and fees and what their impact could be on the investor, and then to make a prudent recommendation. That s what the Best Interest standard of care requires. Having said that, it is the adviser s compensation that creates the conflict of interest (that is, the prohibited transaction). If the investor doesn t roll over the money or transfer the IRA, the adviser will make nothing. But, if the investor does agree to the rollover or transfer, the adviser will earn compensation. As a result of that prohibited transaction, the adviser will need to comply with BICE. If the adviser (and the adviser s supervisory entity and all related and affiliated parties) are pure level fee fiduciaries, the adviser can use the so-called BICE-lite exemption. So, bottom line, the all-in costs are part of the prudence and loyalty ( Best Interest ) analysis and the adviser s compensation is part of the prohibited transaction analysis. By Fred Reish 15

16 17 Does this rule apply to non-registered solicitors on behalf of RIAs? Yes. That is because the fiduciary definition is functional. In other words, if an investment recommendation is specifically directed to a plan fiduciary, a participant or an IRA owner, it is a fiduciary act and the person making the recommendation is a fiduciary. It doesn t matter what registration or license they have, or whether they have any. In this case, a person is recommending an RIA (who presumably will serve as a fiduciary adviser to a plan, participant or IRA owner). Under the new DOL rules (applicable April 10, 2017), a recommendation or referral to a fiduciary adviser is a fiduciary act and the payment of a solicitor s fee would be compensation for the referral (or, in other words, it is compensation for the fiduciary act of referring the RIA). As a result, the solicitor would need to prudently evaluate the RIA before making the referral and would need to act in the best interest of the plan, participant or IRA owner. It is also likely that the compensation would constitute a prohibited transaction, which would require compliance with an exemption (probably BICE) How does this rule affect variable annuities or indexed annuities as vehicles for the rollover into an IRA? The fiduciary rules apply to recommendation of variable annuities and indexed annuities to participants and IRA owners. As a result, a recommendation to invest in either of those products would need to be done prudently and with loyalty to the participant or IRA owner. For example, the adviser would need to consider, among other things, the financial stability of the insurance company and its ability to make the annuity payments in the future; the terms and conditions of the contract, including any conditions, restrictions, penalties and/or surrender charges; the quality and cost of the underlying investments (for a variable annuity); the index and its value to the investor (for indexed annuities); and the costs and payouts under the contract. In addition, the adviser would need to comply with the Best Interest Contract Exemption. BICE has a number of conditions, including that the adviser and the supervisory entity agree to be fiduciaries and act in the best interest of the IRA owner or participant; to receive no more than reasonable compensation; to provide a number of disclosures; and, upon request, to provide detailed information on a number of matters, including compensation; and to maintain a website with specified information and disclosures. 18 By Fred Reish 16

17 19 What documentation is needed when a level fee adviser recommends that a participant take a distribution and rollover to an IRA with the adviser? A recommendation to a participant to take a plan distribution and roll over to an IRA with the adviser is a fiduciary act. As a result, it must be done prudently and loyally. 19 In BICE, the DOL describes specific information that must be reviewed and considered by the adviser in developing and documenting a recommendation: In the case of a recommendation to roll over from an ERISA Plan to an IRA, the Financial Institution documents the specific reason or reasons why the recommendation was considered to be in the Best Interest of the Retirement Investor. This documentation must include consideration of the Retirement Investor s alternatives to a rollover, including leaving the money in his or her current employer s Plan, if permitted, and must take into account the fees and expenses associated with both the Plan and the IRA; whether the employer pays for some or all of the plan s administrative expenses; and the different levels of services and investments available under each option. It appears that other information can (and perhaps should) be considered. Unfortunately, the DOL guidance isn t clear. It is possible, perhaps even likely, that for at least some participants, additional considerations would be important for a prudent recommendation. Two examples of that are: advice for income guarantees and the flexibility of IRA withdrawals. For a level-fee adviser to make a prudent recommendation (and to document that prudence, i.e., best interest ), the adviser needs to obtain the relevant information and to evaluate it. The adviser should then fairly assess the considerations, providing appropriate weight to the factors in the context of which would most likely improve the retirement outcomes for the participant. By Fred Reish 17

18 20 Explain the difference between advice and management, and how they are covered by these rules. The terms advice and recommendations are used to describe non-discretionary investment advice. Sometimes this is (incorrectly, but commonly) referred to as 3(21) advice. Management is used to refer to discretionary investment management. This is often referred to as 3(38) investment management. In both cases, advisers are subject to the fiduciary rules. However, as a general statement, discretionary investment managers cannot use BICE. Stated slightly differently, they cannot have financial conflicts of interest; their services must be provided for a level fee (which means that the advisers and its affiliates cannot receive any compensation on top of the advisory fee, e.g., no proprietary funds, no revenue sharing, no trips). The one exception to that general statement is that a level fee discretionary investment manager can use the so-called BICE-lite exemption for recommendations of distributions and rollovers and for recommendations that an IRA owner transfer his IRA to the adviser. Non-discretionary fiduciary advisers can engage in prohibited transactions, so long as the conditions of an exemption are satisfied. Most likely, the exemption will be BICE. However, if the non-discretionary adviser is a level fee fiduciary without conflicts of interest (i.e., prohibited transactions), he will not need an exemption (which is also true for a discretionary manager) for investment recommendations to plans, participants an IRA owners. And, like a level fee discretionary investment manager, a non-discretionary level fee adviser can rely on BICElite for recommendations to participants to take distributions and roll over to an IRA and to transfer an IRA to an IRA owner with the adviser. 20 By Fred Reish 18

19 21 As part of the overall relationship with my client, I provide asset allocation guidance on their 401(k) participant accounts. I do not charge them a fee for this service. Later, if the client leaves the employer s plan, can I recommend a rollover to my advisory service? Under what conditions? Under the new rules effective April 10, 2017, the relationship of an adviser to a plan will not be relevant. Any recommendation by an adviser to a participant to take a distribution will be a fiduciary act...regardless of whether the adviser has any relationship with the plan (or, for that matter, with the participant). As a result, the recommendation must be in the Best Interest of the participant. To satisfy that standard, an adviser must investigate and evaluate the relevant factors and make a reasoned decision about the prudent course of action for the participant. Keep in mind that a critical question is, what will produce the superior retirement outcome for the participant? If the Best Interest recommendation is to take a distribution and roll over with the adviser, that will result in a prohibited transaction (unless the adviser will make the same amount of compensation from the IRA as he was making on the participants assets in the plan). If the recommendation results in a prohibited transaction, the adviser will need to satisfy the conditions of an exemption, most likely BICE. 21 Content provided by This document was developed by Fred Reish and provided by TD Ameritrade Institutional, and is intended solely for investment professionals. * References to adviser include the supervisory entity (which BICE refers to as the Financial Institution ) and all affiliated and related parties. TD Ameritrade Institutional is a Division of TD Ameritrade, Inc., member, FINRA/ SIPC (together with its affiliates, TD Ameritrade ). Drinker Biddle & and Reath, LLP. is a separate firm not affiliated with TD Ameritrade. The information contained in this document was not independently verified by TD Ameritrade and TD Ameritrade makes no representations about the accuracy of such information. The information provided in this document is deemed to be current as-of the date the document was published, however, the laws and regulations relating to retirement plans and retirement plan service providers, including the laws and regulations referenced in this document, are subject to interpretation as well as legislative and regulatory change. Neither Drinker Biddle & and Reath, LLP nor TD Ameritrade provides legal or tax advice. The practice guidance included in this document is not tailored to the particular circumstances of you or your firm. You must evaluate the appropriateness of the information and guidance for you or your firm and consult with appropriate professionals to address your specific circumstances. This document is intended only to provide education and to facilitate your identification of retirement practice management opportunities. You should consult your own legal and compliance advisors in pursuing any such opportunities and obtain their prior approval and authorization before utilizing the articles, checklists, or other components of this document in your practice. Custody, directed trustee, record keeping, plan design support, and plan administration are provided by TD Ameritrade Trust Company, a non-depository trust company. TD Ameritrade Trust Company and TD Ameritrade, Inc., are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. Business development support, guidance, and tools are provided to independent registered investment advisors by TD Ameritrade Institutional. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company and The Toronto-Dominion Bank TD Ameritrade IP Company, Inc. T /30/2018 TDAI /16