Regulation May Impact Advisor-Intermediated Rollovers from Defined Contribution Plans

January 24, 2024 — Boston

New and proposed regulation emphasize a fiduciary standard when making IRA rollover recommendations

Retirement plan advisors impart a high degree of influence over 401(k) participants’ decisions related to individual retirement account (IRA) rollovers. However, as wealth management firms continue to pursue opportunities in the Employee Retirement Income Security Act of 1974 (ERISA)-covered retirement plan space, they will need to navigate and overcome new and pending regulation imposing more stringent fiduciary requirements when recommending IRA rollovers, according to The Cerulli Edge—U.S. Retirement Edition.

Nearly two-thirds (63%) of the $845 billion in assets rolled over from defined contribution (DC) plans in 2022 were rolled into IRAs with the assistance of a financial advisor. Participants are often reliant on their plan advisor for guidance regarding rollover decisions—more than two-thirds (70%) of retirement specialist advisors say participants in their DC plans frequently ask them questions about IRA rollover decisions—and for advisors, IRA rollovers from DC plans help them grow their wealth management business.

On Oct. 31, 2023, the Department of Labor (DOL) proposed a new fiduciary rule titled Retirement Security Rule: Definition of an Investment Advice Fiduciary. This proposal critically replaces the established five-part test for determining whether an advisor should be subject to ERISA. For example, the proposed test would loosen the “regular basis” condition to include advisors who provide retirement advice on a regular basis as part of their business (rather than considering the “regular basis” condition within the context of an advisor’s relationship with the end-investor). If enacted, this proposal would greatly expand the application of ERISA fiduciary standards, particularly regarding one-time IRA rollover recommendations and IRA owners.

“While regulation promoting a fiduciary standard often benefits end-investors, there likely will be pushback on these key provisions from the insurance industry and broker/dealer-based advisors who sell commission-laden annuity products,” says Shawn O’Brien, director. “Opponents of the proposal note that the Securities and Exchange Commission (SEC) already is enforcing Regulation Best Interest (Reg BI) outside of ERISA-covered retirement plans.”

This proposed “retirement security” rule comes less than two years after the DOL began enforcing new prohibited transaction exemption requirements in 2022 (PTE 2020-02). In order to comply with PTE 2020-02, advisors must document why a rollover is in the best interest of the participant when there is a conflict of interest.

According to Cerulli, nearly one-third (30%) of retirement specialist advisors indicate the new PTE 2020-02 requirements make them less likely to recommend an IRA rollover from a DC plan of less than $50,000. “If enacted, Cerulli would not expect this regulation to have a meaningful impact on higher rollover balances if these balances (and clients’ household wealth) make it worthwhile for advisors to take on the added regulatory scrutiny,” he concludes.

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These findings and more are from The Cerulli Edge—U.S. Retirement Edition, 4Q 2023 Issue.

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