Level Best: Fiduciary Regulation Incorporates ARA’s Level-to-Level Comp Recommendation

In a big win for the advocacy efforts of the American Retirement Association and the National Tax-Deferred Savings Association (NTSA), as well as for plan advisors' abiilty to help participants with rollover decisions, the DOL’s final fiduciary regulation provides a streamlined exemption for “level-to-level” advisor compensation.

In a White House fact sheet released ahead of the final fiduciary regulation, the level-to-level compensation provision enables advisors and firms that receive only a “level fee” in connection with the advice they provide to rely on the exemption without entering into a contract so long as special attention is paid and documentation is kept to show that certain specific recommendations are in the customer’s best interest — including a recommendation to rollover assets from an employer plan to an IRA. Level fee fiduciaries receive the same compensation regardless of the particular investments the client makes, whether based on a fixed percentage of assets under management or a fixed dollar fee.

Original Proposal

Under the proposed fiduciary rule, unless compensation did not increase at all when a rollover from an employer-sponsored plan to an IRA occurs (which is, of course, uncommon due to the customized services typically provided within the IRA), advisors would have only been able to help participants on the rollover if they first complied with the complex and cost-prohibitive “best interest contract” (BIC) exemption. In fact, under the original proposal, advisors with any investment discretion wouldn’t even have been allowed to use the BIC, and thus would have been legally prohibited with working with a participant on the rollover transaction if there was any differential compensation.

That would have effectively penalized the advisor for engaging in the rollover transaction — and would put retirement plan advisers at a competitive disadvantage vis-à-vis advisors who had no previous relationship with the participant in the plan. This issue was raised in testimony during the DOL’s public hearings by Marcy Supovitz, then-President-Elect of the American Retirement Association, and subsequently embraced during the comment period on the proposed regulation by a number of Democratic senators.

Resources

The final version of the regulation is available here.

A chart listing the changes made to the 2015 fiduciary proposal is online here.

A consumer-focused list of FAQs is available here.

The DOL’s fact sheet on the regulation is here.