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).
Stay on top of the latest industry trends and news coverage with a free trial to the Benefits Practice Resource Center.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)