Capturing Rollovers F RED R EISH, ESQ. November 6, 2014

Participant Assets From an ERISA and advisor perspective, there are three potential “buckets” of participant assets: 1Capturing Rollovers - November 6, 2014  401(k) or 403(b) accounts;  Rollovers to IRAs; and  Personal assets. This program focuses on the regulation of rollovers.

2Capturing Rollovers - November 6, 2014 Why is this now the focus of attention? With the aging of the baby boomers in a defined contribution world, the importance—and the amounts—of retirement assets being rolled over to IRAs will be increasing dramatically. Rollovers of distributions are estimated to exceed $2,000,000,000,000 over the next five years.

For an advisor to be fiduciary, the advisor needs to recommend investments to a plan or a participant: Fiduciary Definition 3Capturing Rollovers - November 6, 2014  on a regular basis;  which is mutually understood;  to be “a” primary basis for decisions; and  which is individualized to the needs of the plan or participant.

If an advisor is a fiduciary for recommending investments or investing, the advisor must: Fiduciary Consequences 4Capturing Rollovers - November 6, 2014  engage in a prudent process;  act in the best interests of the plan or the participant;  act for the exclusive purpose of providing benefits;  receive “level” compensation.

The DOL and IRA Rollovers The Department of Labor’s 2005 guidance on “capturing rollovers” from retirement plans was the first step in regulating advisory services for distributions and rollovers. (DOL Advisory Opinion A) 5Capturing Rollovers - November 6, 2014

The DOL and IRA Rollovers In addition, the GAO’s recent report: “401(k) PLANS: Labor and IRS Could Improve the Rollover Process for Participants,” has heightened the awareness of conflicts of interest in the rollover process and increased the likelihood of greater regulation of IRA rollovers. 6Capturing Rollovers - November 6, 2014

GAO Report on Rollovers 7Capturing Rollovers - November 6, 2014 “Plan participants are often subject to biased information and aggressive marketing of IRAs when seeking assistance and information regarding what to do with their 401(k) plan savings when they separate or have separated from employment with a plan sponsor. In many cases, such information and marketing come from plan service providers.” continued...

“... the opportunity for service providers to sell participants their own retail investment products and services, such as IRAs, may create an incentive for service providers to steer participants toward the purchase of such products and services even when they may not serve the participants’ best interests.” GAO Report on Rollovers 8 continued... Continued... Capturing Rollovers - November 6, 2014

GAO Report on Rollovers 9 “Finally, some of the call center representatives did not mention the option of leaving funds in the old plan, 12 of 30 representatives raised doubts about the caller’s ability to roll over to a new 401(k) plan, and several emphasized the rollover assistance they provide.” Continued... Capturing Rollovers - November 6, 2014

Distributions and Rollovers 10 “Rolling assets out of a plan is a broad area that affects plan advisers, consultants, participants and fiduciaries in 401(k) plans, says Jerry Schlichter.” PLANSPONSOR.COM, “New Mortality Tables Will Impact Pension Plan Management,” July 3, continued... Capturing Rollovers - November 6, 2014

Distributions and Rollovers 11 “‘If the plan sponsor provides access to someone pushing IRA [individual retirement account] products, that raises the question of whether there is a fiduciary breach,’ he says. The plan sponsor should monitor communications to participants with an eye out for... red flags.” Continued... Note: Possible consequences. Capturing Rollovers - November 6, 2014

Impact on Non-Fiduciary Advisors When advisors are not acting as fiduciaries to plans,... they may capture IRA rollovers from plans, and may assist in the investment of those rollovers, without concern about ERISA’s fiduciary or prohibited transaction rules. However, FINRA has now issued guidance on the responsibilities of broker-dealers in their rollover practices. 12Capturing Rollovers - November 6, 2014

Why? Customer liquidity events and suitability monitoring: Firms monitor the suitability of registered representatives’ recommendations around key liquidity events in an investor’s lifecycle where the impact of those recommendations may be particularly significant, for example, at the point where an investor rolls over his pension or 401(k). [Emphasis added.] FINRA Report on Conflicts of Interest 13Capturing Rollovers - November 6, 2014

If Rule 2111 is triggered, a registered representative must have a reasonable basis to believe that the recommendation is suitable for the customer, based on information about the options obtained through reasonable diligence, and taking into account factors such as tax implications, legal ramifications, and differences in services, fees and expenses between the retirement savings alternatives. Suitability 14Capturing Rollovers - November 6, 2014

The IRA Rollover Decision A recommendation to roll over plan assets to an IRA rather than keeping assets in a previous employer’s plan or rolling over to a new employer’s plan should reflect consideration of various factors, the importance of which will depend on an investor’s individual needs and circumstances. FINRA Regulatory Notice continued... 15Capturing Rollovers - November 6, 2014

 Investment Options.  Fees and Expenses.  Services.  Penalty-Free Withdrawals. FINRA Regulatory Notice Capturing Rollovers - November 6, 2014  Protection from Creditors and Legal Judgments.  Required Minimum Distributions  Employer Stock... the list is not exhaustive.

FINRA Regulatory Notice Capturing Rollovers - November 6, must consider the customer’s investment profile, including: the customer’s age; other investments’ financial situation and needs; tax status; investment objectives; investment experience; investment time horizon; liquidity needs; risk tolerance; and... any other information the customer may disclose.... [Emphasis added.]

In 2014, reviewing firm rollover practices will be an examination priority, and staff will examine firms’ marketing materials and supervision in this area. FINRA will also evaluate securities recommendations made in rollover scenarios to determine whether they comply with suitability standards in FINRA Rule [Emphasis added.] Note: Also in SEC 2014 Examination Priorities. FINRA Examination Priorities 18Capturing Rollovers - November 6, 2014

FINRA Examination Priorities 19Capturing Rollovers - November 6, 2014 In 2014, FINRA examiners will continue to focus on how firms engage with these senior investors, especially with respect to suitability determinations as well as disclosures and communications. FINRA will also examine firms’ policies and procedures to identify and address situations where issues of diminished capacity may be present. [Emphasis added.]

Legal Background—Fiduciary Advisor In AO A, the DOL said that, if an advisor was already a fiduciary to the plan: a recommendation to take a distribution and/or to roll over to an IRA; advice on how to invest the funds in the IRA; or answering questions about these matters; could be subject to ERISA’s fiduciary responsibility and prohibited transaction rules. 20Capturing Rollovers - November 6, 2014

Legal Background In effect, the DOL is taking the position that a fiduciary advisor—has such influence over participants’ thinking that the advisor has expanded its authority to encompass distributions, rollovers and IRA investing. While it is possible that, in an individual case, a fiduciary advisor could exercise undue influence over participant’s decision to take a distribution and roll into an IRA with the advisor, that would be highly unusual. 21Capturing Rollovers - November 6, 2014

22Capturing Rollovers - November 6, 2014 The preamble to the withdrawn fiduciary advice proposal states: “The Department, therefore, is requesting comment on whether and to what extent the final regulation should define the provision of investment advice to encompass recommendations related to taking a plan distribution.” Capturing Rollovers

Compliance Steps for All Advisors  Education on four alternatives: pros and cons  Checklist for suitability discussion  Disclosures of fees and expenses for advice and IRAs  Participant acknowledgment 23Capturing Rollovers - November 6, 2014

Steps for Advisors The descriptive materials concerning distributions could include discussions of the advantages and disadvantages of: leaving the money in the current plan; transferring it to the plan of their new employer; taking a taxable distribution; rolling into an IRA of their choice 24Capturing Rollovers - November 6, 2014

A conservative approach could provide written disclosures of fees and expenses for the IRA and its investments. These disclosures should be made prior to the participant making a decision about using the advisor. 25Capturing Rollovers - November 6, 2014  Note: Similar to 408(b)(2). Steps for All Advisors

Steps for Advisors Under a conservative approach, an advisor should obtain written acknowledgments that a participant made the decision to work with the advisor of his own free will and was not influenced by the advisor. That approach could also acknowledge that the participant made the decision to take a distribution— without influence from the advisor. 26Capturing Rollovers - November 6, 2014

27Capturing Rollovers - November 6, 2014 The IRA Rollover: 10 Tips to Making a Sound Decision The largest source of IRA contributions comes from individuals who move their money from their employer-sponsored retirement plans such as 401(k) and 403(b) plans when they leave a job, according to the Employee Benefit Research Institute. If you are considering rolling over money from an employer plan into an IRA—or if you have been in contact with a financial professional to do so—follow these tips to decide whether an IRA rollover is right for you. 1.Evaluate your transfer options. You generally have four choices. You can usually keep some or all your savings in your former employer's plan (check with your benefits office to see what the company's policy is). You can transfer assets to your new employer's plan, if allowed (again, check with the benefits or human resources office). You can roll over your plan assets into an IRA. Or you can cash out your balance. There are pros and cons to each, but cashing out your account is rarely a good idea for younger individuals. If you are under age 59½, the IRS generally will consider your payout an early distribution, meaning you could owe a 10 percent early withdrawal penalty on top of federal and applicable state and local taxes...

Steps for Advisors Issues that may attract DOL attention: recommendations that participants take distributions (and particularly in-service distributions). discussions that favor one form of holding retirement assets over another (e.g., IRA rollovers over leaving money in the plan). recommendations that result in high or hidden costs or compensation of the advisor. recommendations that result in conflicts of interest. 28Capturing Rollovers - November 6, 2014

Steps for Advisors Other considerations: Capturing rollovers for existing wealth management clients. Charging fees for IRA at plan levels. Capturing rollovers for sophisticated investors. Charging a set fee for financial planning and wealth management. 29Capturing Rollovers - November 6, 2014

Questions?

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