Capturing Rollovers
FRED REISH, ESQ.
November 6, 2014
Participant Assets
From an ERISA and advisor perspective, there are
three potential “buckets” of participant assets:
 401(k) or 403(b) accounts;
 Rollovers to IRAs; and
 Personal assets.
This program focuses on the regulation of rollovers.
Capturing Rollovers - November 6, 2014
1
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.
Capturing Rollovers - November 6, 2014
2
Fiduciary Definition
For an advisor to be fiduciary, the advisor needs to
recommend investments to a plan or a participant:
 on a regular basis;
 which is mutually understood;
 to be “a” primary basis for decisions; and
 which is individualized to the needs of the plan
or participant.
Capturing Rollovers - November 6, 2014
3
Fiduciary Consequences
If an advisor is a fiduciary for recommending investments
or investing, the advisor must:
 engage in a prudent process;
 act in the best interests of the plan or the
participant;
 act for the exclusive purpose of providing
benefits;
 receive “level” compensation.
Capturing Rollovers - November 6, 2014
4
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)
Capturing Rollovers - November 6, 2014
5
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.
Capturing Rollovers - November 6, 2014
6
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 . . .
Capturing Rollovers - November 6, 2014
7
GAO Report on Rollovers
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.”
continued . . .
Capturing Rollovers - November 6, 2014
8
GAO Report on Rollovers
Continued . . .
“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.”
Capturing Rollovers - November 6, 2014
9
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.”
continued . . .
PLANSPONSOR.COM, “New Mortality Tables Will Impact Pension
Plan Management,” July 3, 2014.
Capturing Rollovers - November 6, 2014
10
Distributions and Rollovers
Continued . . .
“‘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.
The
plan
sponsor
should
monitor
communications to participants with an eye out
for . . . red flags.”
Note: Possible consequences.
Capturing Rollovers - November 6, 2014
11
Impact on Non-Fiduciary Advisors
When advisors are not acting as fiduciaries to
plans, . . .
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.
Capturing Rollovers - November 6, 2014
12
FINRA Report on Conflicts of Interest
Why?
Customer liquidity events and suitability monitoring:
Firms monitor the suitability of registered representatives’
recommendations around key liquidity events in an
investor’s lifecycle where the impact of those
recommendations may be particularly significant, for
example, at the point where an investor rolls over his
pension or 401(k). [Emphasis added.]
Capturing Rollovers - November 6, 2014
13
Suitability
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
reasonable diligence, and taking into account factors
such as tax implications, legal ramifications, and
differences in services, fees and expenses between the
retirement savings alternatives.
Capturing Rollovers - November 6, 2014
14
FINRA Regulatory Notice 13-45
The IRA Rollover Decision
A recommendation to roll over plan assets to an IRA
rather than keeping assets in a previous employer’s
plan or rolling over to a new employer’s plan should
reflect consideration of various factors, the importance
of which will depend on an investor’s individual needs
and circumstances.
continued . . .
Capturing Rollovers - November 6, 2014
15
FINRA Regulatory Notice 13-45
 Investment Options.
 Protection from Creditors
and Legal Judgments.
 Fees and Expenses.
 Services.
 Required Minimum
Distributions
 Penalty-Free Withdrawals.  Employer Stock
. . . the list is not exhaustive.
Capturing Rollovers - November 6, 2014
16
FINRA Regulatory Notice 13-45
. . . must consider the customer’s investment profile,
including:
• the customer’s age;
• investment objectives;
• other investments’
•
• financial situation and
needs;
• investment time horizon;
• tax status;
• risk tolerance;
investment experience;
• liquidity needs;
and . . . any other information the customer may disclose . . . .
[Emphasis added.]
Capturing Rollovers - November 6, 2014
17
FINRA Examination Priorities
In 2014, reviewing firm rollover practices will be an
examination priority, and staff will examine firms’
marketing materials and supervision in this area.
FINRA will also evaluate securities recommendations
made in rollover scenarios to determine whether they
comply with suitability standards in FINRA Rule 2111.
[Emphasis added.]
Note: Also in SEC 2014 Examination Priorities.
Capturing Rollovers - November 6, 2014
18
FINRA Examination Priorities
In 2014, FINRA examiners will continue to focus on how
firms engage with these senior investors, especially with
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.]
Capturing Rollovers - November 6, 2014
19
Legal Background—Fiduciary Advisor
In AO 2005-23A, the DOL said that, if an advisor was
already a fiduciary to the plan:
• a recommendation to take a distribution and/or to
roll over to an IRA;
• advice on how to invest the funds in the IRA; or
• answering questions about these matters;
could be subject to ERISA’s fiduciary responsibility
and prohibited transaction rules.
Capturing Rollovers - November 6, 2014
20
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.
Capturing Rollovers - November 6, 2014
21
Capturing Rollovers
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 - November 6, 2014
22
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
Capturing Rollovers - November 6, 2014
23
Steps for Advisors
The descriptive materials concerning distributions
could include discussions of the advantages and
disadvantages of:
• leaving the money in the current plan;
• transferring it to the plan of their new employer;
• taking a taxable distribution;
• rolling into an IRA of their choice
Capturing Rollovers - November 6, 2014
24
Steps for All Advisors
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).
Capturing Rollovers - November 6, 2014
25
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.
Capturing Rollovers - November 6, 2014
26
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.
....
Capturing Rollovers - November 6, 2014
27
Steps for Advisors
Issues that may attract DOL attention:
• recommendations that participants take distributions
(and particularly in-service distributions).
• discussions that favor one form of holding retirement
assets over another (e.g., IRA rollovers over leaving
money in the plan).
• recommendations that result in high or hidden costs
or compensation of the advisor.
• recommendations that result in conflicts of interest.
Capturing Rollovers - November 6, 2014
28
Steps for Advisors
Other considerations:
• Capturing rollovers for existing wealth management
clients.
• Charging fees for IRA at plan levels.
• Capturing rollovers for sophisticated investors.
• Charging a set fee for financial planning and wealth
management.
Capturing Rollovers - November 6, 2014
29
Questions?
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
FOLLOW FRED ON TWITTER @FREDREISH
CALIFORNIA | DELAWARE | ILLINOIS | NEW JERSEY
NEW YORK | PENNSYLVANIA | WASHINGTON DC | WISCONSIN
© 2008 Drinker Biddle & Reath LLP | All rights reserved.
A Delaware limited liability partnership