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New DOL Fiduciary Rules Make Advice By A Financial Advisor To A Participant To Take A Lump Sum From A Qualified Plan A Fiduciary Matter, Even If You Are Not The Plan’s Advisor

Posted by Robert K. Butterfield | May 26, 2015 | 0 Comments

To: Financial Advisors

New DOL fiduciary rules make advice by a financial advisor to a participant to take a lump sum from a Qualified Plan a fiduciary matter, even if you are not the Plan's advisor.

Thus—caveat emptor as:

  1. It is a fiduciary matter you can be sued over and disciplined by regulators for
    1. (a) Arranging for a participant to sell existing Plan assets to roll over to an IRA you manage or benefit from. This means if the IRA does worse than the Plan would have done with the prior mix (in fees, performance or both) you can be subject to suit, discipline or both.
    2. (b) Same thing if fees in the IRA are higher than the Plan fees you charge to the Plan.
    3. (c) Same thing if you are not the advisor to the Plan and would benefit $ wise from the IRA, as ANY fees you get from the IRA are more than you'd get from the Plan.

So keep in mind that a simple recommendation to a participant to take a distribution is going to be a fiduciary matter fraught with peril for you if the participant later can demonstrate fees, investment performance, and transaction costs to sell and distribute and to reposition assets were more “in your interests” than the participant's interests. A higher level of disclosure and planning might be necessary to cover yourself from regulators and suits.

After all, many times you may be dealing with participants who are in large Plans with low fees that you cannot benefit from at all—and you then advise the participant to distribute the account from the Plan and reposition assets in an IRA with fees that you benefit from. It might be hard to explain later to FINRA, SEC or a court. They might say you should have advised the participant to keep the $ in the Plan and you provide advice as to asset allocation in the Plan. Of course you would not be able to afford to give such free advice, making it important to make sure the participant understands they would pay higher fees with you, would pay transaction costs to reposition assets (possibly to sell assets too) and that they agree to the higher fees because they want YOU to be their advisor. But in reality no matter what you do, some participants will use hindsight to claim they did not understand the situation, did not fully realize that and that the advice you gave was not in their best interests. It's a bit of a new world on that.

About the Author

Robert K. Butterfield

Robert Butterfield's practice emphasis is on employee benefits, executive compensation, ERISA, estate planning and corporate planning.


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