from Fred Reish’s “Interesting Angles on the DOL’s Fiduciary Rule #29”
What are the relevant factors for evaluating whether a participant should take a distribution? In other words, what information does an adviser need to gather and review?
In BICE, the DOL identifies three specific types of relevant information about the retirement plan. (Note that there may be relevant factors in addition to these three, but the DOL is saying that a recommendation to take a distribution would, at the least, need to consider these.) Those factors are: the investments in the plan; the services provided by the plan; and the expenses in the plan. Examples of other relevant matters are whether the plan permits periodic distributions without charge, and whether the participant is invested in company stock in the plan (particularly if the participant has a low basis in the company stock compared to its current value). Those factors, and other relevant matters about the plan, need to be evaluated. Of course, that means that information needs to be obtained.
Where the adviser already provides services to a plan, it should be relatively easy to gather the information. However, if the adviser does not work with the plan, the adviser will need to make a diligent effort to gather that information. (The Department of Labor says in Question 14 of the FAQs that the adviser “must make diligent and prudent efforts to obtain information on the existing plan.” Question 14 goes on to say: “In general, such information should be readily available as a result of DOL regulations mandating plan disclosure of salient information to the plan’s participants (see 29 CFR 2550.404a-5).)”
In other words, the adviser should ask the participant for a copy of the plan’s 404a-5 disclosures (which are also known as participant disclosures and/or the Investment Comparative Chart). That should be readily available to a participant, since those materials are provided to participants when initially eligible and, again, each year thereafter. In addition, an adviser could ask a participant for his most recent quarterly statement, which should reflect any expenses being charged against the participant’s account, as well as how the participant is invested and the account balance. Those statements should also be readily available since, for participant-directed plans, they are provided quarterly.
In addition a participant would have access to materials through the participant’s page on the plan’s website.
In other words, the information is readily available. (Note that the FAQs provide alternative methods of obtaining the information, but only after the adviser has engaged in “diligent and prudent efforts to obtain information,” but has not been able to do so.)
In addition to the information about investments and expenses, an adviser also needs to obtain information about plan services. In many cases, that could be done through interviewing the participant. For example, does the plan have a brokerage account option? Does the plan provide non-discretionary investment advice services or discretionary investment management services? Once that information has been gathered, an adviser should compare it to comparable information about the proposed IRA. While the gathering of information, in and of itself, can take some work, the analysis is the critical step. The information is just the foundation from which to make the analysis.
The key to the analysis and the development of a prudent recommendation is to focus on the best interest of the participant. Also, keep in mind that BICE requires that the adviser document why the recommendation is in the best interest of the investor.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.