Fiduciary Rule May Affect 401(k) Rollovers

Fiduciary Rule May Affect 401(k) Rollovers

By Lynn Brackpool Giles

In March 2016, just one month before the Department of Labor’s (DOL) issuance of the new Fiduciary Rule, Fidelity Research released a report that showed a whopping 73 percent of financial advisors were concerned the Rule would negatively affect their business.[1]  

And it appears their worries were justified.

It’s still unclear whether or not the rule will discourage advisors from recommending an asset rollover from a 401(k) plan to an IRA. Some industry leaders, however, fear it will negatively affect investor options.

 “Advisory firms are considering re-evaluating their service models, the products they recommend and the investors they serve in response to the pending DOL Fiduciary Rule,” Fidelity Clearing and Custody Solutions chief operating officer Tom Corra stated in March.

“Many registered investment advisors – who are already held to a fiduciary standard under the Investment Advisors Act – are also seeing the rule as challenging, particularly its impact on their rollover and IRA business,” he added.

The final rule states that “recommendations to take a distribution or rollover to an IRA and recommendations not to take a distribution or to keep assets in a plan should be treated the same in terms of evaluating whether the communication constitutes fiduciary investment advice.” [Emphasis added.]

Under previous regulations, advisors were bound only by a suitability standard and had more leeway to recommend a rollover where appropriate.

Now that this action requires a fiduciary standard for all, advisors will have to document that moving assets to an IRA is in a client’s best interest. Though some feel that a fiduciary environment will render this justification increasingly difficult to make, others say it’s relatively straightforward.

Michael Branham, CFP, of The Planning Center is a former Financial Planning Association president who lobbied the DOL and the Securities & Exchange Commission on the importance of elevating the fiduciary standard. He’s made the case for rollovers in the past, and feels the new rule sets the same bar for everyone.    

“The new DOL rule ensures that all advisors account for the numerous considerations when recommending a rollover,” he said. “In many instances, there are advantages to consolidating 401(k)s into an IRA, including a potential higher level of service and financial planning support; increased investment options on the ‘outside’; and, in some cases, even lower fees than within the 401(k) plan itself.”

Others say that tightening up how options like rollovers are discussed will ultimately hurt consumers.

“We remain quite concerned that the DOL’s final rule is not informed by sound, practical economic analysis, and that the rule could indeed end up costing investors billions of dollars if it deprives them of access to the advice and help that they need,” said Paul Schott Stevens, president and CEO of Investment Company Institute, in a recent speech.[2]

Even the DOL appears to recognize the challenges when it noted that “some employers and service providers could restrict the type of investment education they provide regarding rollovers and plan distributions based on concerns about fiduciary liability.”

The Society for Human Resource Management (SHRM) seems to agree. The group reported that the rule will have a “significant effect on rollovers from 401(k) and similar defined contribution plans to IRAs.”[3]  

SHRM also quoted Erin Sweeney, a fiduciary litigation attorney with Washington, D.C.-based Miller & Chevalier: “The DOL sort of paternalistically has reached the conclusion that participants are better off in employer 401(k) plans where there is a plan fiduciary deciding on the available investments, and where ultimately there could be a lawsuit brought if one of those investments are shown not to have been appropriate for the participants as a whole. More people will just simply, by inertia, keep their dollars in 401(k) plans, and that may not be right for everybody.”

Company-sponsored 401(k)s may provide such advantages as company stock incentives, access to stable value investments and other institutional investments at a lower expense ratio than an IRA and the ability to tap into funds at an earlier age without penalty if certain conditions are met.

The long-term outcome for rollovers is still unknown, but advisors like Branham sense a more pressing trend.

“I’ve already seen a real push from some parts of our profession to do as many rollovers as possible between now and when the DOL rule takes place,” he said. “The desire to push 401(k) dollars into lucrative products just got fast-tracked, and consumers should take notice.”


[1] https://www.fidelity.com/about-fidelity/institutional-investment-management/dol-fiduciary-rule

[2] https://www.ici.org/pressroom/speeches/16_pss_dol_fiduciary

[3] https://www.shrm.org/hrdisciplines/benefits/articles/pages/fiduciary-rule-plan-sponsors.aspx

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