INFRONT
Rollovers In The Crosshairs Advisors must be in compliance with the new Department of Labor investment advice rule by the end of January. The impact on rollover business is significant. By John Hilton
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hen the Department of Labor crafted its investment advice rule, everyone knew the types of questionable sales practices it had in mind. But its biggest impact might come on simple rollovers, the kind of transactions that had not been considered fiduciary advice in the past. Several legal analysts are warning advisors to be careful about these transactions in 2022. “Many may be surprised to learn that this ruling impacts all wealth managers who recommend rollovers, even if the advisors had no advisory relationship with a plan itself,” wrote Kim Shaw Elliott, a partner with The Wagner Law Group, in a client alert. “This is a major departure from past practice, since historically advice to roll assets out of a Title I Plan, even when combined with a recommendation as to how the distribution should be invested, did not constitute investment advice,” she noted. The rule was authored during the 6
Trump administration, but the Biden administration allowed the investment advice rule to take effect Feb. 16. It replaces the Obama administration fiduciary rule, which imposed substantial regulations on commission-based sales of annuities. A federal appeals court sided with industry plaintiffs and tossed out the rule in 2018. The investment advice rule has two main parts: new Prohibited Transaction Exemption 2020-02, allowing advisors to provide conflicted advice for commissions, and a reinstatement of the "five-part test" from 1975, to determine what constitutes investment advice. It came with a compliance date of Dec. 20, but the DOL is giving advisors a sixweek pause, until Jan. 31, 2022.
Pay Attention
The penalties for running afoul of the new advice rules are significant, Shaw Elliott noted. “Advisors who engage in prohibited transactions can be punished severely, including a whopping excise tax of up to 100% of the amount involved, compounded over time,” she wrote. “The IRS might disqualify the IRA, resulting in the entire value of the IRA being included in the income of the IRA owner in the year of the breach.” So how did we get here? Let’s back up and review the law.
InsuranceNewsNet Magazine » December 2021
Long-standing Employee Retirement Income Security Act law forbids an investment advisor from receiving additional compensation as a result of a recommendation to a plan or plan participant unless an exemption is available, Shaw Elliott explained. Under the new interpretation, the rollover advice itself likely is conflicted. “This is true even if the adviser goes from receiving no compensation when the recommendation is made to any compensation in the future from the IRA,” she wrote. “The advice is considered fiduciary investment advice because it is necessarily a recommendation to liquidate or transfer the plan’s property interest in the affected assets and the participant’s property interest in plan investments.” More transactions than what are traditionally thought to be rollovers are considered. The investment advice rule prohibiting transaction exemption defines a rollover to cover five different transactions: » ERISA-covered plan to an IRA. » ERISA-covered plan to another ERISAcovered plan. » IRA to an ERISA-covered plan. » IRA to another IRA to the extent permissible under the Code (including an individual retirement account, Health Spending
