While a majority of individual retirement accounts aren't subject to the Employee Retirement Income Security Act, there's still a concern that some advisers may flee the business as a result of the Department of Labor's new proposal to redefine the term “fiduciary,” general counsel for the American Retirement Association said.

Craig P. Hoffman said the jurisdiction over IRAs may seem to lay clearly with the Internal Revenue Service, but it's actually a little murky. The prohibited transaction excise tax rules in the Internal Revenue Code are almost identical to the prohibited transaction rules that are built into ERISA, he said.

“The only consequence of violating the prohibited transaction rules for a non-ERISA IRA is paying the excise tax, and so that has been sort of the rub for the DOL as to how they fashion this law,” Hoffman said April 30 during a session of the American Society of Pension Professionals & Actuaries' Philadelphia Regional Conference.

This results in the DOL writing the excise tax rules, while the IRS is left to collect the taxes, he said.
Hoffman said one of the ARA's concerns with the proposal “is that there aren't a heck of a lot of IRS agents out there policing IRAs looking to collect excise taxes.”

This has left many fearing that the restrictions included in the new fiduciary proposal are going to cause “good advisers to just get out of the IRA business and leave the bad folks out there” to play the “audit lottery” with the IRS, he said.

Advisers can avoid violating the prohibited transaction rules by going on a fee-only basis, but when it comes to small accounts, most don't want to go that route, he said.

The DOL's proposed rule (RIN 1210-AB32), released April 14, would require brokers to work under a fiduciary duty when working with retirement investors, meaning they would have to act in the clients' best interest. Presently, they are held to a “suitability” standard, meaning they can sell products that generally fit an investor's needs and tolerance for risk.

Also during the week of April 27, the head of the Financial Industry Regulatory Authority said the DOL consulted with the group before rolling out the proposed rule, and Sen. Elizabeth Warren (D-Mass.) sent letters to the U.S.'s 15 largest annuity providers as part of her efforts to learn whether perks they provide encourage brokers to put personal interests ahead of the retirement goals of clients.


Hoffman said there is also a concern about how the new proposal treats rollovers.

In DOL Advisory Opinion 2005-23A, the agency said recommending that a participant take a distribution isn't a fiduciary act, Hoffman said.

The new proposal renders that invalid, he said.

“If somebody comes to an adviser and says, should I take my money out and put it in an IRA, if they say yes, they're now a fiduciary with regard to that IRA,” he said.

Excerpted from a story that ran in Pension & Benefits Daily (05/01/2015).

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