DOL rule is gone, but rollover compliance questions linger

Even after the demise of a regulation that would have imposed tougher rules on 401(k) rollovers, experts say the trillion-dollar segment of the industry is still heavily scrutinized.

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Tough regulatory oversight of retirement plan rollovers (such as moving assets out of a 401(k) and into an individual retirement account) may lead some financial advisors and firms to avoid the transactions entirely and miss out on that business. Tapping into the opportunities poses regulatory and operational challenges, according to panelists speaking on a webinar about rollover rules held earlier this month by wealth management compliance technology firm InvestorCOM.    

Many industry groups praised federal court decisions that tossed the Biden administration’s Retirement Security Rule in March. But on the ground, compliance leaders across the industry continue to wonder how to comply with rollover rules, said Parham Nasseri, president of InvestorCOM, citing a message from an audience member.

“It symbolizes the purpose of today’s conversation and why we’re here,” he added. “Lots has happened over the years, and the ambiguity remains, and our primary goal is to bring clarity to the conversation.”

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A simple yet tricky requirement

The discussion carries big stakes, considering that an estimated $1.2 trillion flows out of retirement plans in rollovers each year, noted Tracey Longo, the Washington editor with wealth management industry news outlet Financial Advisor Magazine. Advisors must navigate rollover guidelines that include the Securities and Exchange Commission’s Regulation Best Interest and registered investment advisory firms’ fiduciary duty to their clients, along with Labor Department guidance about so-called prohibited transaction exemptions and the five-part test under the Employee Retirement Income Security Act. 

But those rules boil down to simple practices that document the reasons behind an advisor’s rollover recommendations.

“There’s huge opportunities here for those who want to take on fiduciary responsibility, huge competitive opportunities,” Longo said. “For those who take on full fiduciary rollover responsibility, you must provide the client written reasons why the rollover is in their best interest.”

That process can become tricky, however, because of everything that is involved with a transaction, noted William Nelson, director of public policy and associate general counsel with the Investment Adviser Association, a trade and advocacy group for asset management firms.

“As a former chief compliance officer, I can tell you, the SEC is very focused on rollovers,” Nelson said. “Are you looking at the plan, what type of fees are they charging? What services are your clients getting when you’re rolling it over, what are you rolling over to? If it’s to an IRA, do you have any financial relationships with that company? Is it in the client’s best interest? Could it be in the client’s best interest to stay in the plan, obviously, unless they’re being kicked out, for whatever reason?”

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InvestorCOM

Drawing out plan data can be the toughest part

Part of the process entails the advisor examining alternatives to the rollover and then verifying that they have done so in the course of any potential regulatory examination, according to Ed Wegener, a former FINRA official who is now the managing director of governance, risk and compliance with Oyster Consulting, a wealth management consulting and technology firm.

Wegener emphasized that advisors must have access to accurate data to conduct this analysis. 

“I always recommend that firms do make sure that they document the basis for these recommendations, because, if asked to explain why a recommendation was in a client’s best interest, if you don’t have that information and documentation, it’s going to be very difficult to demonstrate how that conclusion was drawn,” he said. “So it makes it a lot easier if you do have documentation.” 

Unfortunately, that can be tough for advisors trying to get the information about the clients’ existing plans ahead of the rollovers, according to Fred Reish, an employee benefits lawyer who is the director of ERISA and fiduciary strategy with Overland Park, Kansas-based RIA firm Prime Capital Financial and of counsel with the Ferenczy Benefits Law Center. Regulators will want to see that the rollover is “an individualized decision” that took the services, investments and costs on either side of the transaction into account, along with the needs and circumstances of that client, Reish said.

“It’s not like some generic, ‘Everybody’s better off doing such and such,'” Reish said. “But if you can gather that and then document it, one, you’ve engaged in a process that cuts across all these different regulatory bodies as being compliant. Secondly, it’s not just the truth that you did it, but you have the proof that you did it, in case the regulators come in and look at you. So, plan information, IRA information, investor information and then an analytical process that says, ‘Hey, what’s best for this person over the long haul?’ And I think that is an approach that will serve you well, no matter which regulatory regime we’re talking about. But it’s hard.”

Getting the plan data can be the hardest part, he said, but a necessary one.

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InvestorCOM

A dauntingly ‘big shift’ for firms

In that environment, wealth management firms must develop technology that removes friction from compiling that documentation, or they can hire outside vendors that can provide those tools, according to Dave Reeve, the CEO of InvestorCOM. Without citing the firm’s name, he said “one of the very large platforms in the U.S. market” that has more than 2,500 advisors just doesn’t perform any rollovers “because the advisors feel like it’s too difficult,” Reeve said.

“There’s no question we see them stepping into this trillion-dollar opportunity by leveraging simple tech to make this opportunity easy for advisors,” he said. “The other thing we see, in some cases, there are firms that have always been focused on this convergence of retirement and wealth opportunities. But in other cases, there are firms that have decided to shift from education to recommendations to position themselves for this growth. So that’s a big shift.”