The U.S. Department of Labor has provided guidance on how fee-based RIAs can use the “level-fee” exemption to recommend IRA rollovers under the DOL’s fiduciary rule for retirement accounts.
The level-fee exemption is a streamlined provision within the full best-interest contract (BIC) exemption. It is designed primarily to provide relief for rollover recommendations made by advisors who charge asset-based or retention fees.
As part of its FAQ guidance released late last week, the DOL described how fee-based advisors can recommend a rollover from an employer retirement plan, or from a commission account.
First, the advisor must provide written acknowledgement of fiduciary status, comply with the fiduciary rule overall, and disclose fees in advance to the investor.
Advisors must also document the reasons why the advice was considered to be in the best interest of the investor, the DOL says.
In the case of a recommendation to roll over a plan, “this documentation must include consideration of the retirement investor’s alternatives to a rollover, including leaving the money in [the] employer’s plan … and must take into account the fees and expenses associated with both the plan and the IRA; whether the employer pays for some or all of the plan’s administrative expenses; and the different levels of services and investments available under each option.”
Furthermore, fee-based advisors “must make diligent and prudent efforts to obtain [cost] information on the existing plan,” which is provided to defined-contribution plan participants under DOL rule 404a-5. That rule requires disclosure of plan-level charges and details of investment-related expenses.
“If, despite prudent efforts, the financial institution [or advisor] is unable to obtain the necessary information or if the investor is unwilling to provide the information, even after fair disclosure of its significance, the financial institution could rely on alternative data sources, such as the most recent Form 5500 or reliable benchmarks on typical fees and expenses for the type and size of plan at issue,” the guidance says.
If the financial institution relies on such alternative data, “it should explain the data’s limitations” and document in writing “how the financial institution determined that the benchmark or other data were reasonable.”
RIAs and other fee-based advisors using the level-fee exemption also need to be careful in going after commission accounts.
The guidance warns against recommending fee-based accounts to investors who do little trading or have no need for ongoing monitoring or advice.
In making rollover recommendations to brokerage customers, “financial institutions and advisers should consider whether the type of account is appropriate in light of the services provided, the projected cost to the customer, alternative fee structures that are available, and the customer’s fee structure preferences, in addition to non-price factors,” the DOL says.
The level-fee exemption is not available to those recommending products that generate transaction-based payments such as 12b-1 fees or revenue-sharing fees, or when fee-based compensation is limited to proprietary products.
Hybrid advisors can recommend rollovers using the level-fee exemption for advisory services, and the full BIC for commission accounts.