How do I provide fiduciary advice regarding an IRA rollover without violating ERISA rules?
In most cases, rollover advice would result in a prohibited transaction because the advice, if followed, would affect the advisor’s compensation. In order to exempt this prohibited transaction when providing advice regarding an IRA rollover, you must rely on an applicable exemptions. These three exemptions are the most likely to be applicable, but others not listed here may be also be available in certain situations:
- The Best Interest Contract Exemption (BIC Exemption): This exemption covers most types of advisors but has some onerous requirements. If available, your financial institution will provide you with the appropriate contract and paperwork to comply with its many provisions, and will enter in to the arrangement on your behalf.
- The Level Fee Option of the BIC Exemption: This exemption is available only for advisors who will directly charge the participant a level fee in the IRA after the rollover. Further, that fee must be the only compensation the advisor and any of his or her affiliates will receive, and cannot be the result of a commission or revenue sharing arrangement. However, the IRA level fee need not be the same as any fee the advisor may have been charging the plan from which the rollover came. Further, the advisor must provide a written explanation of why the rollover is in the participant’s best interest, ensure the fee is reasonable, and make no materially misleading statements.
- PTE 84-24: Available for fixed-rate annuities and insurance contracts only, this exemption permits traditional insurance commissions to be received. However, the advice must be in the best interest of the participant, fees must be no more than reasonable, and no materially misleading statements can be made. The exemption does not cover bonus or other compensation not included in the definition of an insurance commission.