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Rollovers And The Fiduciary Duty
To help retirement savers with rollovers , advisors must work closely with their compliance departments .
By Lowell M . Smith Jr .
IT ’ S BECOME A TRICKY THING FOR ADVISORS to navigate : giving advice to clients about rolling over their retirement plan assets into IRAs while also staying within bounds of various compliance requirements . This confusion arises from a tangled web of regulatory guidelines , overlapping fiduciary definitions , and the Department of Labor ’ s ongoing ( but as-yet-unresolved ) attempts to revise its fiduciary rules .
As a result , advisors may find themselves unsure of the precise obligations they have to meet when advising clients on rolling over plan assets .
The current regulatory landscape remains complex , but it ’ s manageable . Under the prevailing rules , a onetime recommendation to a client to roll over plan assets does not constitute fiduciary advice , meaning that such recommendations do not run afoul of safeguards outlined in the Employee Retirement Income Security Act ( ERISA ). However , professionals providing securities recommendations , including onetime recommendations to roll over retirement plan assets , must still comply with the requirements of the U . S . Securities and Exchange Commission , which are similar to the DOL ’ s standards , albeit with notable differences .
As of now , the DOL ’ s latest fiduciary rule is on hold while two Texas courts determine whether to vacate the latest provisions . Until these decisions are finalized , investment professionals must rely on older guidelines , specifically the 1975 five-part test established under ERISA and the Internal Revenue Code . This test defines what qualifies as fiduciary investment advice subject to the DOL ’ s enforcement .
To qualify as a fiduciary under the 1975 test , an investment professional must render advice for a fee and meet five criteria . First , the professional must provide advice to a retirement plan or IRA about the value of or the advisability of investing in securities or other property . Second , this advice must be given on a regular basis , not as a onetime recommendation . Third , the advice must be provided under a mutual agreement or arrangement between the advisor and the client . Fourth , the advice must serve as a primary basis for the client ’ s investment decisions about their retirement plans or IRAs . Finally , the advice must be tailored to the specific needs of the client .
If all five conditions are met , the investment professional is deemed a fiduciary and cannot engage in activities that pose conflicts of interest . This includes situations where the advisor or their firm receives commissions or other compensation tied to the advice provided . In such cases , the fiduciary must operate under a “ prohibited transaction exemption ,” a set of conditions the fiduciary must meet when providing advice , to ensure that their actions align with legal standards and protect the investor ’ s best interests .
Despite the current uncertainty surrounding the DOL ’ s new fiduciary rules , there are several exemptions that remain avail-
50 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2024 WWW . FA-MAG . COM