On Oct. 27, the Department of Labor issued its Conflict of Interest Exemption FAQs, 34 questions and answers about the fiduciary advice regulation, the 84-24 exemption (for fixed rate annuities and life insurance policies), and the Best Interest Contract Exemption for any and all types of investments.

While the FAQs included questions covering all of that guidance, the focus was on the BICE.

I’ll focus this article on one of the BICE issues—the streamlined provision for recommendations of distributions and rollovers by “Level Fee Fiduciaries,” sometimes called “BICE-lite.”

In Q&A 14, the DOL posed this question:

Can an adviser and financial institution rely on the level fee provisions of the BIC Exemption for investment advice to roll over from an existing plan to an IRA if the adviser does not have reliable information about the existing plan’s expenses and features?

In its answer, the DOL said that a Financial Institution (for example, a broker-dealer or RIA firm) could rely “on alternative data sources, such as the most recent Form 5500 or reliable benchmarks on typical fees and expenses for the type and size of plan at issue.”

That sounds helpful, but there are strings attached.

The DOL began its discussion by describing the responsibility of advisers and Financial Institutions (e.g., a broker-dealer or RIA firm) to document why a recommendation would be considered to be in the best interest of a “retirement investor” (that is, a participant). The exemption requires documentation that takes into account the fees and expenses in both the plan and the recommended IRA, and the different levels of services and investments available in the plan and the recommended IRA.

(Note that this is a simplification of the requirements. For example, the analysis must consider all of the alternatives open to the participant, including staying in the plan, rolling the money to the plan of a new employer, taking a taxable distribution, and rolling to an IRA. And, BICE requires that the Financial Institution and advisor engage in a prudent process, which generally requires an investigation of the needs of the investor and the considerations related to that.)

The guidance then goes on to say that the advisor and Financial Institution “must make diligent and prudent efforts to obtain information on the existing plan.” The DOL notes that, in general, that information should be readily available from the 404a-5 participant disclosures (which are sometimes referred to as the Investment Comparative Chart). ERISA-governed qualified retirement plans must provide those disclosures to employees when they are first eligible to participate and annually thereafter. As a result, that information should be readily available to participants and, therefore, to advisors. 

In addition to the participant disclosures, that information is generally included in the participant’s page for the plan website and, therefore, available in that form. And, finally, some of that information appears on the quarterly participant statements.

In other words, in almost all cases, the information will be available.

Returning to the DOL’s position that, if the information is not available (or if the participant refuses to provide it), the Financial Institution could rely “on alternative data sources, such as the most recent Form 5500 or reliable benchmarks and typical fees and expenses for the type and size of plan at issue.”

The DOL imposes additional conditions if this alternative is used. For example, the DOL says that, if the information is not otherwise available, the Financial Institution must first provide the participant with fair disclosure of the significance of the missing information. Then, if the Financial institution and adviser rely on that “alternative data,” it must explain the limitations of the data and its written documentation must include an explanation of how the Financial Institution determined that the benchmark or other alternative data was reasonable under the circumstances.

In other words, the burden of using alternative data is significant, but at least there is an alternative where the information cannot otherwise be obtained.

Keep in mind that the use of alternative information does not limit the information required to be analyzed. It just provides that it can be obtained from an alternative source. That information still includes, at the least, information about the services in the plan and the IRA and information about the investments and expenses in the plan and in the proposed IRA.

Where industry data is used about plans of comparable sizes, that would include the services in plans of comparable sizes (for example, are there participant investment management services; does the plan allow for brokerage accounts; information about investment alternatives and their expense ratios on an industry-wide basis for plans of that size; and information about other plan expenses (e.g., administrative or recordkeeping expenses that are charged to participants) for plans of that size. So, the analysis continues to be the same; it’s just the source of data that can vary.

Also remember this, most participants are covered by larger plans (that is, plans with 100 or more participants). The Forms 5500 for those larger plans include an accountant’s statement. Those statements list the plan’s investment options and their share classes. Since well over half of the participants are in larger plans, that information is readily available to Financial Institutions and advisers. For example, the information can be obtained from the DOL’s website for 5500 forms.

These rules become applicable on April 10, 2017. They will affect virtually all RIA firms and broker-dealers. Almost all advisors make recommendations about distributions and rollovers.

This task should not be taken lightly.

It is a fiduciary duty and the recommendation must be prudently developed. Keep in mind that the fiduciary rules impose a duty to investigate the “relevant” factors and to use that information in developing a reasonable and prudent recommendation.