DOL Conflict of Interest Rule Impacts Rollovers | Capital Group

Capital Group Policy Spotlight

June 23, 2017

DOL Conflict of Interest Rule Impacts Rollovers

The Department of Labor (DOL) conflict of interest rule has a far-reaching impact on financial advisors with clients in retirement plans. Here is what the new fiduciary rule means for 401(k) rollover recommendations.

Under the DOL fiduciary rule, which took effect June 9, financial advisors who recommend that a client roll over a 401(k) into an individual retirement account (IRA) are considered fiduciaries. This significant change requires these advisors to follow the DOL’s protocol for fiduciaries and avoid conflicts of interest.

No-Fee Rollover Recommendations

The mere fact that an advisor does not charge for a specific rollover recommendation does not exempt the recommendation from the new rule’s requirements. The DOL considers any compensation advisors receive in connection with a transaction, whether direct or indirect, as covered by the new rule. This includes advisory fees or commissions the advisor would earn as a result of the rollover.

What Qualifies as Advice?

The finalized fiduciary rule broadly defines investment advice concerning rollovers. A recommendation that a client move funds from an employer-sponsored retirement account to an IRA is considered advice — even if the recommendation:

  • Is not the primary basis for the client’s decision
  • Is made in connection with a recommendation to hire the advisor

Providing General Information Not Considered Advice

The fiduciary rule does allow an education safe harbor for advisors. Providing basic information about the pros and cons of rollovers will not be considered fiduciary advice. The line between a rollover recommendation and education, however, will depend on specific circumstances.

Fiduciary Requirements for Advisors Recommending 401(k) Rollovers

Under the fiduciary rule, which took effect on June 9, advisors must recommend a rollover only if it is in the client’s best interest. As part of this responsibility, advisors will need to consider:

  • Fees and expenses associated with both the plan and the IRA
  • Available investments under both
  • Whether the employer pays some or all plan expenses

Best Interest Contract Exemption

An advisor will need to satisfy the Best Interest Contract (BIC) exemption if:

  • The advisor will receive compensation only if a client rolls over a 401(k) into an IRA
  • The advisor’s compensation will vary (as will most commonly be the case)

The BIC exemption is complicated and the advisor’s firm will need to determine whether and how to utilize the exemption. At a minimum, advisors will need to:

  • Act in the best interest of the client
  • Charge the client only reasonable compensation
  • Avoid conflicts of interest and making any misleading statements about fees
  • Contemporaneously document the rationale behind the rollover recommendation

The full requirements of the BIC exemption will not go into effect until January 1, 2018. Capital Group and American Funds encourage financial advisors to direct specific questions to their individual firms.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.