The Fiduciary Rule, Distributions and Rollovers

information provided by Fred Reisch blog at

Now that it seems likely that the fiduciary rule and the transition exemptions will continue “as is” until at least July 1, 2019, it’s time to re-visit the fiduciary rule and the requirements of the transition exemptions. This article focuses on the requirements for recommending that a participant take a distribution and roll it over to an IRA with a financial institution and its advisor. (Practically speaking, the financial institutions will likely be broker-dealers, RIA firms, and banks and trust departments). For ease of reading, this article uses “advisor” to refer to both the entity and the individual.

In order to recommend that a participant take a distribution, the financial institution and advisor must satisfy ERISA’s prudent man rule and duty of loyalty. That is because a recommendation to a participant is considered to be advice to a plan. Among other things, that means that, if the advisor violates the rules, there is a cause of action under ERISA for breach of fiduciary duty (as opposed to the Best Interest Contract Exemption, where a private right of action is less certain).

If the advisor will earn more money if a participant’s benefits are moved to an IRA, that will be a prohibited transaction. As a result, the advisor will also need to comply with the condition of an exemption, most likely the Best Interest Contract Exemption (BICE). The transition version of BICE requires that an advisor adhere to the Impartial Conduct Standards. Of those standards, the most significant for this purpose is the best interest standard of care. Since the best interest standard of care and ERISA’s duties of prudence and loyalty are substantially similar, this article just refers to the best interest standard (even though both apply). The best interest standard requires that an advisor obtain the information that is relevant to making a prudent and loyal recommendation about a distribution. The Department of Labor has said that, at the least, that includes the services, investments, and fees and expenses in both the plan and the IRA. In addition, the best interest standard requires that the plan and IRA information be evaluated in light of the needs and circumstances of the participant.

The information about the services, investments, and fees and expenses in the plan is the most difficult to obtain. Fortunately, that information can be found in the participant’s plan disclosure statements. Additional important information is in the participant’s quarterly statements.

But, what if the participant can’t locate the information? Realistically, that should be a rare case, since plan sponsors are required to distribute the disclosures at the time of initial participation and annually thereafter.

But, what if the participant can’t find those disclosure materials? In a set of Frequently Asked Questions, the DOL responded that an advisor must make “diligent and prudent efforts” to obtain the plan information. If the participant can’t find those materials, then it seems likely that, at the least, a diligent and prudent effort would require that the advisor inform the participant that:

  1. The information is usually available on the plan’s website and they could obtain it from that source.
  2. The information is available from the plan sponsor upon request to the benefits personnel.

If neither of those options is successful, or if the participant is unwilling to take those steps, the advisor can use information from the Form 5500 or from industry averages. (Interestingly, 5500 data is not considered primary data for this purpose. It can only be used after a diligent and prudent effort has been made to obtain current plan data from the participant.)

Even where 5500 data or average plan data is used, there are additional considerations:

  • The advisor must provide “fair disclosure” of the significance of using the primary plan data, that is, current information about the plan from, e.g., the participant disclosure forms.
  • Plan averages must be based on “the type and size of plan at issue.” As a result, the advisor will need to know the type and size of the plan.
  • The advisor must explain the alternative data’s limitations.
  • The advisor must explain “how the financial institution determined that the benchmark or other data were reasonable.”

However, it would likely be a rare case that alternative data could be used. If a financial institution finds that its advisors are consistently using alternative data, that suggests that the advisors are not making “diligent and prudent efforts” to obtain actual plan data. The consequence of non-compliance is that the compensation paid from the rollover IRA is prohibited and cannot be retained by the financial institution or the adviser. There could also be an ERISA claim for breach of fiduciary duty.

An additional issue is that the “alternative data” may only include information about fees and expenses. In order to perform a best interest analysis, the advisor must also have information about a plan’s services and investments. For example, does the plan offer a brokerage account where, if the participant desired, the participant could have access to a wider range of investments? Another example is whether the plan offers discretionary investment management for participants’ accounts. If it does not, that may be a valuable service offered by the IRA; but, if it does, the expenses and the quality of those services in the plan and IRA should be compared.

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Finding Fees to Satisfy DOL Rule – Part 2

FeeX for Advisors helps financial advisors comply with the new Department of Labor fiduciary rule regarding 401k rollovers and IRA transfers. FeeX automatically collects and analyzes the 404a5 participant fee disclosure document as its main data source and runs a detailed analysis on an investor’s existing account, taking into consideration the investor’s specific plan and holdings.  This type of detailed analysis could take a veteran advisor days to complete and is now required under the new DOL rule.

The FeeX for Advisors platform automates and streamlines compliance processes thereby saving financial advisors valuable time which allows them to focus their efforts where they are truly needed – helping customers.

The platform allows for a side-by-side comparison of fees, features, past returns and asset allocation against a model portfolio or personalized portfolio. It can be white labeled and deployed in a matter of minutes. It is currently being used by thousands of advisors as well as Fortune 100 financial services companies.

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Finding Fees to Satisfy DOL Rule

A question I keep hearing is “how do I determine the fees associated with the 401(k) or other retirement plans that a client currently owns?”  Good question and could be a difficult one to answer.  Here are some suggestions:

  1. Ask the client to provide you with the Summary Plan Description for the plan.  This should have the information that you require.
  2. Check out a website  It looks like they will provide the information, but you may receive solicitations after entering information to obtain a response.
  3. RiXtrema’s tool IRAFiduciaryOptimizer is a paid software that could be of assistance.

If any of you try these, I would appreciate any feedback.

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Be Aware When Wiring Funds for a Client’s Escrow

It has come to my attention that wiring funds to close an escrow for a client could end up with funds going to a hacker.

My understanding is that most escrow companies will give the wiring instructions to the client initially and will NOT change the instructions after they initially give them to the client.  However, some hackers have been sending clients (those that are buying the house) new wiring instructions.  Then the funds for their new home are wired to the hacker instead of the escrow company.

I suggest that, as done with any wire, that you call the escrow company directly via a phone number that you already have and confirm the wiring instructions.  If you are aware that your client is buying a home and will need funds from their account, get those instructions and/or the contact information for the escrow company early on in the process.

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DOL Rule

As the effective date, June 9, 2017, rapidly approaches below is some information to keep in mind.

As a “fiduciary” to a plan or a participant governed by ERISA’S prudent man rule and duty of loyalty, an advisor must engage in a process that a knowledgeable person would evaluate prior to making a decision.

An example when recommending a distribution:

  1. Gather information regarding the investment, services, etc. within the plan (need to know what they already have)
  2. What are the expenses, services, etc available within the new recommended product/plan (need to know what they will have if they move to the recommendation)
  3. What are the needs/circumstances of the person – which course of action (maintain or move) is more appropriate for the participant relative to their retirement

This information needs to be gathered and evaluated with a duty of loyalty to the participant.


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DOL Rule Prohibited Transaction Exemptions

From Fred Reish 

Fred’s last post (Angles #44) discussed the requirements of ERISA’s prudent man rule and of the best interest standard of care for IRAs and plans. This article outlines the requirements of the two prohibited transaction exemptions that will apply to recommendations of investment products and services and insurance products to plans, participants and IRAs (“qualified accounts”). Those two exemptions are:

  • Prohibited Transaction Exemption 84-24 (which covers recommendations of insurance products, including annuities and life insurance policies). This “transition” 84-24 has been amended to cover all types of annuities (group and individual, variable, fixed rate and fixed index) and applies to the period from June 9, 2017 through December 31, 2017.
  • The Best Interest Contract Exemption (BICE) which can be used for sales of any investment products and services or any insurance products (including those covered by 84-24) during the transition period.

Before discussing the general requirements of those exemptions, I should point out that not all advisory services require the use of an exemption. For example, if an adviser provides investment services to a plan, participant or IRA for a pure level fee, there is not a conflict of interest, in the sense that the adviser’s compensation remains the same regardless of the investments that are recommended. By “pure level fee,” I mean that neither the adviser, nor any affiliate nor related party (including the adviser’s supervisory entities, e.g., broker-dealer), receives any additional compensation or financial benefit.

If, however, the adviser, or any affiliated or related party, does receive additional compensation, that would be a financial conflict of interest, which is a “prohibited transaction” under ERISA and the Internal Revenue Code. In that case, the adviser would need to take advantage of one of the exemptions: BICE or 84-24. (I should point out that neither 84-24 nor BICE is available where the adviser has discretion over the investments in the plan, participant’s account or IRA. As a result, discretionary investment management must be for a pure level fee or a different exemption must be found.)

Here are some examples of compensation that constitutes a prohibited transaction: commissions; 12b-1 fees; trailing payments; asset-based revenue sharing; solicitor’s fees; proprietary investments; and payments from custodians. If any of those payments, or any other financial benefits (such as trips, gifts, or marketing allowances), are received by the adviser, or any affiliated or related party, partially or entirely as a result of an investment or insurance recommendations, that would be a prohibited transaction.

The most common exemption will be the Best Interest Contract Exemption. During the transition period, that exemption, BICE, requires only that the adviser (and the adviser’s Financial Institution, e.g., the RIA firm or broker-dealer) “adhere” to the Impartial Conduct Standards (ICS). There are three requirements in the ICS. Those are:

  • Best interest standard of care (which, in its essence, consists of the prudent man rule and duty of loyalty).
  • The receipt of only reasonable compensation.
  • The avoidance of any materially misleading statements.

The use of the word “adhere” means only that the adviser and Financial Institution must comply with those requirements. There is not a requirement to notify the plan, participant or IRA owner of those requirements, nor is there a requirement during the transition period to enter into a Best Interest Contract.

On the other hand, 84-24 does impose some written requirements. For example, the insurance agent or broker must disclose his initial and recurring compensation, expressed as a percentage of the commission payments. And, the plan fiduciaries or IRA owners must, in writing, acknowledge receipt of that information and affirm the transaction. On top of that, though, the agent must also “adhere” to the Impartial Conduct Standards.

Offices of Financial Institutions need to focus on the training of their advisers to comply with the prudent process requirement imposed by the fiduciary rules, including documentation of those processes. While part of a prudent process will be similar to what is currently required under the suitability and know-your-customer rules, these new fiduciary standards place greater emphasis on certain factors, for example, the costs of investments and the quality of the investment management (as well as the financial stability of an insurance company).

With regard to the reasonable compensation requirement, the burden of proof is on the person claiming that the compensation was reasonable. In other words, the burden of proof will be on the broker-dealer, the RIA firm, and the agent or insurance adviser. As a result, advisers and Financial Institutions should have data in place to support their compensation for each investment category that they recommend to plans, participants and IRA owners.

Finally, with regard to 84-24, the required disclosure and consent forms need to be developed and agents need to be educated on the use of the forms, including the disclosure and consent requirements.

Unfortunately, in a short article like this one, I can only discuss some of the requirements. Obviously, there is more than this, but this is a good starting point for understanding the rules and working on compliance with the new requirements.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

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Alert – Google Docs Phishing Outbreak

from Barkly

A sweeping campaign of phishing emails masquerading as a shared Google doc invite has infected troves of Google users on Wednesday, accessing their contacts lists to spread the attack further.

On Wednesday afternoon, the Internet lit up with reports of phishing emails disguised as invites to a shared document in Google Docs. In many cases, the email appeared to be sent from someone the recipient actually knew — another victim of the attack who had already had their account compromised.

They also resembled the typical Google Docs invite perfectly, with the lone exception of including the recipient “hhhhhhhhhhhhhhhh at”


Once clicking “Open in Docs,” however, victims were asked to grant access to their account to a fake Google Docs app, which promptly took advantage of that access to raid the victim’s contacts list and use it to send out identical phishing emails to replicate the attack.

Google reacted swiftly to the attack by shutting down the rogue app and adding warnings to suspected phishing emails. But with an untold number of accounts already compromised, the fallout from this attack could be far from over.

What to do:

  • Tell your users not to click on any Google Docs invitations they received on Wednesday.
  • If they suspect their Google account may have been compromised: Tell them to go to to check what apps have authorized access. If they see a “Google Docs” app authorized on Wednesday they should remove it as well as any other apps they don’t recognize.
  • Make sure you’re prepared for additional phishing emails from compromised accounts by reminding users to be on high alert and by ensuring you have the right malware protection in place.

Get the full details on the phishing campaign in our latest blog post (Barkly’s

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SEC Explores Ways to Strengthen Compliance of Independent Advisers

SEC Explores Ways To Strengthen Compliance Of Independent Advisers (Mark Schoeff, Investment News) – At a recent compliance conference, the acting director of the SEC’s Office of Compliance Inspections and Examinations (OCIE) noted that the SEC has increasing concern about the rise of independent advisers affiliating with RIA platforms as “1099” advisers, as opposed to investment adviser representatives who are salaried employees of the RIA. The problem is that SEC examiners are finding a different level of compliance amongst employee representatives versus independents, who almost by definition are more independent and less tied to the parent RIA, and therefore may be less tied to the firm’s compliance oversight and processes, not unlike the challenge of overseeing independent 1099 brokers at an independent broker-dealer. As a result, acting director Peter Driscoll suggested that the SEC may soon publish a Risk Alert about the issue, implying that RIAs with independent 1099 advisers may soon get more scrutiny about how they exercise compliance oversight of those advisers in their upcoming SEC exams (which, although infrequent, are trending higher as OCIE tries to increase its exam cycle frequency). Notably, though, the top SEC concern for advisors at this point is still cybersecurity, and there will likely be more guidance forthcoming on that issue soon as well.

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Microsoft Office Vulnerability Fix

From True North Networks

WARNING – There is currently an aggressive attack campaign underway against a previously undisclosed vulnerability in Microsoft Word, which can be used to quietly install different kinds of malware — even on fully-patched computers. The bug can be exploited on all versions of Microsoft Office, including the latest Office 2016 version running on Windows 10.

The vulnerability cannot bypass the Office Protected View, which should be turned on by default. You can verify those settings using the following steps:

Step 1: Start Word, click File and then choose Options

Step 2: Click Trust Center and then Trust Center Settings

Step 3: Click Protected View, all three of the options listed there should be checked

Step 4: Click OK and you’re done!

Unlike most document-related vulnerabilities, this zero-day bug doesn’t rely on macros (macros use built in code to execute pre-scripted command actions) — in which Office typically warns users of risks when opening macro-enabled files. There is currently no patch for this bug, but Microsoft is expected to release a fix with its next round of security updates. Once released, you will receive the patch within your regularly scheduled patch window. In the meantime, be extra cautious when opening Microsoft Word attachments.


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DOL Rule Updates

The Department of Labor (“DOL”) published its final rule delaying the applicability dates of its rule changing the definition of the term “fiduciary” (the “Fiduciary Rule”)  by 60 days, as proposed.  The new timeline for compliance with the Fiduciary Rule is as follows:

  • June 9, 2017 – The Fiduciary Rule becomes applicable.
  • June 9, 2017 – Firms relying upon the BIC Exemption  must comply with Impartial Conduct Standards but no additional conditions.
  • June 9, 2017 through December 31, 2017 – the Transition Period (discussed below).  During the Transition Period, DOL will review the Fiduciary Rule and report on the factors outlined in the Presidential Memorandum.
  • January 1, 2018 – Firms relying upon the BIC Exemption must come into full compliance.

As noted above, the final rule adopted a 60-day delay of the applicability date of the Fiduciary Rule from April 10, 2017 to June 9, 2017.  The applicability dates of the Best Interest Contract Exemption (the “BIC Exemption”) were also extended to June 9, 2017.

The BIC Exemption already provided for a “Transition Period” between the original applicability date of the Fiduciary Rule and January 1, 2018, the date when fiduciaries relying on such exemptions are expected to be in full compliance.  The final rule does not change the full compliance date for those exemptions.

The final rule does simplify compliance with the BIC Exemption during the Transition Period.  During the Transition Period, fiduciaries will only be required to comply with the “Impartial Conduct Standards” and not the other conditions of such exemptions, such as the affirmative disclosure requirements.  The Impartial Conduct Standards require that fiduciary advisers make recommendations that are in the customer’s best interest (subject to a prudence and loyalty standard), receive no more than reasonable compensation, and not make materially misleading statements.

The final rule also delays the applicability date for the streamlined “Level Fee Fiduciary” exemption within the BIC Exemption until June 9; however, during the Transition Period, Level Fee Fiduciaries that are eligible for the Transition Period relief under the full BIC Exemption may comply with those conditions (i.e., only the Impartial Conduct Standards) instead.

The future of the Fiduciary Rule continues to be uncertain. DOL has requested comments from interested stakeholders on the issues raised by the Presidential Memorandum by April 17.  Next steps will remain unclear until senior DOL officials are confirmed.  Further delays are possible, followed by modifications or rescission of the rule.


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