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A Better Partnership


Aug 2012
August 28, 2012

Rollover Recapture: A Review

Several of our registered investment adviser and broker-dealer clients have recently asked whether it is permissible for an adviser or broker-dealer to make a recommendation to a 401(k) plan participant that he roll over his account into an IRA. This activity is often referred to as “cross selling” or “rollover recapture.” Because there is not a single answer to this question, we thought it would be helpful to review the current Department of Labor (DOL) guidance on this issue.

In a 2005 Advisory Opinion (AO), the DOL responded to a request for guidance concerning advice, including advice about rollovers and other services provided directly to plan participants by financial planners and advisers. The AO contained three questions and answers that are summarized below.

Q1: Is an individual who advises a participant for a fee on how to invest the assets in the participant’s 401(k) plan account, or who manages the investment of the participant’s 401(k) plan account, a fiduciary with respect to the 401(k) plan within the meaning of ERISA Section 3(21)(A)?

A1: Yes. Directing the investment of a plan constitutes the exercise of authority and control over the management or disposition of plan assets and the person directing the investments would be an ERISA fiduciary, even if the person is chosen by the participant and has no other connection to the plan.

Q2: Does the recommendation that a participant roll over his account balance to an IRA constitute investment advice with respect to plan assets?

A2: Merely advising a participant to take an otherwise permissible plan distribution, even when that advice is combined with a recommendation as to how the distribution should be invested, is not investment advice under ERISA. Where, however, the adviser or broker-dealer is already a fiduciary to the plan (because he is already providing investment advice or management at either the plan or participant level), then responding to participant questions concerning the advisability of taking a distribution or the investment of amounts distributed from the plan is a fiduciary act subject to ERISA’s fiduciary obligations (which require the fiduciary to act prudently and solely in the interest of the participant). Additionally, if, for example, an adviser or broker-dealer who is a fiduciary causes a 401(k) plan participant to take a distribution and then invest the proceeds in an IRA account managed by the fiduciary (or an affiliated company), the fiduciary may be using plan assets in his own interest in violation of ERISA’s self dealing prohibited transaction rules.

Q3: Would an adviser or broker-dealer who is not otherwise a fiduciary and who recommends that a participant take a plan distribution and invest the funds in an IRA engage in a prohibited transaction if the adviser or broker-dealer will earn management or other investment fees related to the IRA?

A3: No. A recommendation that a participant take an otherwise permissible distribution by someone who is not connected to the plan, even when combined with a recommendation as to how to invest the distributed funds, is not investment advice under ERISA.

The AO does not prohibit an adviser or broker-dealer who is a fiduciary from making a rollover recommendation, provided the adviser or broker-dealer considers only what is in the best interests of the participant. Depending on the participant’s situation, it may be in the participant’s best interest to remain in the plan. If a participant determines that a rollover into an IRA is more appropriate, an adviser or broker-dealer who is a fiduciary cannot receive any commission or other incentive payment in connection with a rollover from the 401(k) plan into an IRA. In addition, if the funds are rolled over into an IRA managed by an adviser or broker dealer who is a fiduciary, the fee charged by the IRA should be the same or lower than the fee currently being paid to the adviser or broker-dealer by the 401(k) plan or the participant. Such transactions likely would not run afoul of ERISA’s self-dealing prohibited transaction rules.

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