Adding rollovers and IRAs to the definition of fiduciary duties, the U.S. Department of Labor's new proposed rule could have a huge impact on firms in a fast-growing and profitable segment of the retirement savings industry.

The new proposal will permit broker commissions if certain conditions are met for those advising individuals or small plans rolling over from company 401(k) plans to particular IRAs. The inclusion means that broker dealers and advisors would have to disclose, for instance, if a client would be putting their money in an investment vehicle with a higher fee by, says Marcia Wagner, principal of Boston-based Wagner Law Group.

"This is ridiculously important," says Wagner. "Rollovers, which [are] a multi-trillion dollar industry, [are] now clearly subject to ERISA standards. It is crystal clear that the U.S. government says IRA holders need the same protections as 401(k) participants. For commission-based advisors, this is a game changer."

This the first time federal authorities broadened the fiduciary standard to include 401(k) or employee plan rollovers and IRAs. Legal experts say that such advice by practice is currently deemed within the suitability standard rather than ERISA-mandated fiduciary duty.

In the DoL's new proposal released on Tuesday, a retirement planner's fiduciary duties would include, "a recommendation to take a distribution of benefits, or a recommendation as to the investment of securities or other property to be rolled over or otherwise distributed from the plan or IRA."

The DoL's previous fiduciary standard proposal in 2010, which it later withdrew in 2011, only posed the question as to whether the standard should apply to rollovers, but did not specify that it would.

A commission-based financial advisor would require written contracts clearly stating any fees, conflicts of interests and provide information to increase transparency so that clients would know what they would be investing in, she adds.

"Given the majority of advisors … don’t have these contracts -- they don’t disclose any conflicts and many are commission based -- this would be a sea change in how the model will work going forward."

The DoL's new proposal gets to the root of the service provided, says Brian Hamburger, founder of MarketCounsel and the Englewood, N.J.-based Hamburger Law Firm.

"If the service is investment advice, then it must be done by a fiduciary," he says.  "If you are merely selling and not furnishing such advice, you can still avoid being held to a fiduciary duty."

The impact of the new proposal on a firm will depend on how they’ve been acting, Hamburger adds.

"If they are already acting as an RIA, they will just add a facet to their supervisory systems.  In that case, the impact could be negligible.  However, if they’ve been providing advice but are not registered as an investment adviser, this will be new territory.  They’re going to have to avoid certain conflicts, disclose other conflicts, and make recommendations that are in the best interest of clients, not just suitable."

Though this is still a proposal and will go through a series of steps, including two periods of public commentary, the broadened fiduciary standard will likely remain part of any final rule, says John C. Hughes, a Boise, Idaho-based ERISA attorney and co-editor-In-chief of 401(k) Advisor

"Ultimately the rule is going to lead to advisors excising additional caution," Hughes says. "It will make it harder for advisors and broker dealers, and make business more costly and difficult."


Hughes says the new proposal squarely takes aim at the rollover industry, which was worth roughly $352 billion at the start of last year, according to Cerulli Associates of Boston. The research firm also estimates that total IRA assets at the beginning of 2014 were close to $7 billion.

"Certainly it's political," Hughes says. "The government is throwing out numbers in the material it has issued stating that billions are being lost from retirement savings. That money is not being lost. It is winding up with the people providing investment services instead of in the pockets of people saving for retirement. Clearly the aim is to shift where that money goes."

Wagner adds the move to include rollovers and IRAs is partly recognition of an aging population by government officials.

"I think there are deep concerns of a real retirement crisis, especially when Baby Boomers are aging and the foundation of Social Security is so wobbly," she says. "I think this was entirely intended. It really is a function of IRAs becoming significant as a retirement income replacement."

It's also a measure against some bad practices in the industry, says Michael Case Smith, chief operating officer for Asset Advisors of America, a Longwood, Fla.-based RIA.

"Wall Street brokers don’t care about 401(k)s, they care about rollovers," he says.  "That why a lot of companies have taken positions to capture 401(k) participants.

"I would … rather be advising someone about investing in index funds and helping people with budgets and not making my money off of American workers," Smith adds. "Hidden fees can eat up to a quarter million from someone's retirement. I want the American worker to have that, not a broker."

He predicts adding rollovers and IRAs into the fiduciary standard will possibly prompt two changes: brokers transitioning to RIAs, or firms working with a third party computer-based model that takes brokers out of investment advice.

It is important that rollovers and IRAs are included in the fiduciary standard now, says Christine Lazaro, director of the Securities Arbitration Clinic at St. John's University School of Law.

"As individuals retire and are faced with the decision of what to do with the money in their employer-sponsored plans, they often seek advice from investment professionals, expecting that the advice they receive will be in their best interests," Lazaro says. "At that point in time, when they are being advised to move their money into IRAs managed by the investment professional, it is essential that the investment professional is held to the highest standards to protect the retirement savings of Americans. 

"The standards shouldn’t only apply after the money has been moved," Lazaro adds.  "If it is not in the investor’s best interest to move the money out of the employer-sponsored plan, it should be left alone.  The profit motives of firms cannot and should not drive the decision to move an investor’s retirement savings out of the employer-sponsored plans."


Once filed with the federal registry, advocates and opponents will have an opportunity to weigh in on the proposal during a 75-day comment period, following a yet-to-be scheduled public hearing. After the close of the comment period, the Obama administration will decide what to incorporate into the fiduciary rule.

"We're going to see a lot of commentary on the next two months," Hughes says. 

For now, most major IRA providers are limiting their comments on the new proposal.

"We need to thoroughly review the proposal, and expect that we will have comments to offer during the public comment period," says a Charles Schwab spokesperson.

Fidelity, according to firm spokesman Stephen Austin, stresses the importance of workers receiving financial advice and investment options.

“Low and middle income investors need access to guidance, especially when they leave their jobs,” Austin says. “When workers leave employers and receive guidance they are three times less likely to cash out, according to our research. That’s the worst possible outcome.”

Fidelity will continue studying the proposal, including its language on IRAs and rollovers, he adds.

“It’s important to our customers for their retirement,” he says.

Consumer advocates say they are expecting firms will claim the broadened definition will limit investor choices and result in firms having to pass on higher costs to clients.

"Investors should have options, but they should have options that are good for them," Barbara Roper, director of investor protection at Consumer Federation of America says. "We can all agree if we took away the option to provide advice that is harmful to your customers, that would be one option we can do without."

Roper says she expects some wording of the proposal to change regarding rollovers and IRAs, but hopes the basic components of it can hold.

"When the DoL withdrew its previous proposal in 2011, the main industry players and lobbyists bet all their chips on killing the proposal and expecting it to never be re-proposed," she says. "They squandered the opportunity to be constructively engaged. It remains to be seen whether they will constructively engage to try to shape the rule, or bet all their chips on the notion that they can kill the rule."

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