For the third time in five years, the Department of Labor (DOL) is adopting a new position on how to apply a fiduciary standard to advisory work on IRA rollovers. According to attorneys at Eversheds Sutherland, this interpretation is likely to wind up in court.

The DOL is embracing a position that rollover advice is fiduciary investment advice “if it entails disposition of investments in a retirement investor’s current retirement arrangement and acquisition of investments in the new arrangement and satisfies the five-part test of fiduciary status laid out in [the] DOL’s 1975 ERISA regulation.” This definition is not limited to investments that are regulated as securities. It also applies to any asset or property of the retirement plan or IRA, the attorneys said.

For instance, this new interpretation forbids an advisor who recommends the purchase or sale of a proprietary mutual fund's shares to charge a sales commission or surrender charges or duplication of an advisory fee. It also requires the advisor to seek independent fiduciary approval for proprietary products.

The DOL’s position is likely to compel some broker-dealers and other firms to reconsider how or whether they want to provide rollover advice to retirement investors. The DOL’s new position requires financial services providers to neutralize any conflicts of interest in the rollover advice or find a “prohibited transaction exemption” that provides relief. Back in 2016, when the Obama administration introduced a similar version of the rule, many broker-dealers decided to forbid brokers from charging commissions on IRA rollovers.

Neutralizing conflicts is easier said than done, according to Eversheds Sutherland. “If DOL persists with and asserts this interpretation in future enforcement cases, it seems inevitable that its position will eventually be tested in court, which absolutely is not the way such a consequential policy decision should be made,” the attorneys said in a new client alert.

“In the meantime, financial services providers will need to come to terms with DOL’s position and consider their alternatives for continuing to be of service to retirement investors while operating on an ERISA-compliant basis,” Eversheds Sutherland said.

In many cases, broker-dealers will face two choices to meet the requirements: They will have to either delegate the rollover advice to an unconflicted financial expert or forgo compensation, (or do both).

To paraphrase the DOL’s five-part test, a person is an ERISA fiduciary if that person, for a direct or indirect fee:

1. Makes recommendations to a plan, plan fiduciary, plan participant or IRA owner as to the advisability of investing in, purchasing or selling securities or other property of the plan or IRA;
2. Makes such recommendations regularly;
3. Makes such advice pursuant to a mutual agreement, arrangement or understanding, written or otherwise;
4. Offers advice that will serve as a primary basis for investment decisions with respect to plan assets or IRA investments;
5. Offers advice that will be individualized based on the particular needs of the plan, participant or IRA owner.

According to the DOL, it can enforce the new rollover interpretation on any rollover advice provided after February 16, 2021. The department “has functionally left no time for financial services providers to ascertain the applicability of [its] new rollover interpretation to their business model, design a compliance solution, operationalize that compliance solution and train its workforce in that solution,” the attorneys said.

Even if a provider creates a compliance system to comply with the department’s now-vacated Obama-era DOL rule and has been observing the terms of the department’s temporary enforcement policy in other aspects of its business, applying the system to rollovers “is optimistically a 12-month process for most providers. However it chooses to proceed substantively, DOL has exposed financial services providers to unwarranted legal risk for which it must provide a workable fix,” Eversheds Sutherland warned.

The law firm said for now it was leaving aside “the prospects of whether the DOL will be able to prevail in its interpretation” to focus on possible compliance alternatives if the DOL’s interpretation stands, using these steps:

• Is it possible and appropriate to assist with rollovers without taking on ERISA fiduciary status?
• If not, is it possible and appropriate to neutralize any conflict of interest embedded in the rollover advice?
• If not, is there an applicable ERISA prohibited transaction exemption that provides conflict of interest relief?

In guidance announcing its position, the DOL said there are cases where rollover interactions do not rise to the level of fiduciary advice. For instance, merely executing a rollover at the request of a retirement investor does not result in fiduciary status. “If no recommendation is provided, by definition, there cannot be fiduciary investment advice,” Eversheds Sutherland said.

Firms that provide education only or have a business model that may not confer a fiduciary status, such as an insurance company that makes a single sale, may be able to avoid rising to a fiduciary level, they added.