IRA Rollovers and Transfers To
Custodial IRAs Under New DOL Rules

The new DOL fiduciary investment advice rule is effective April 10, 2017. For reason discussed below, the new definition of an investment advice fiduciary will have limited impact for custodial IRAs. Consequently, the Best Interest Contact PT exemption will not apply and will not need to be used.

All IRA custodians and IRA trustees and various financial service providers want to understand how the new DOL rules for fiduciary investment advice applies to them and what changes, if any, they should consider making, in their IRA services business model.

For those banks offering only custodial IRAs, the answer is, no change is generally needed. An IRA custodian may continue its current IRA service model of offering its own savings and time deposits, including accepting rollover and transfer contributions from 401(k) plans, other retirement plans and other IRAs.

A custodial IRA is one where the IRA investments are restricted to the savings and time deposits as offered by that FDIC insured bank. In general, a bank offering custodial IRAs is NOT Subject to the New DOL Fiduciary Advice Rules and the New Best Interest Contract Prohibited Transaction Exemption Rules. IRA plan agreements will not need to be amended for this reason, but there are other business reasons why it is prudent to furnish an amended IRA plan agreement for 2016-2017.

A custodial IRA custodian/trustee is not required to go through a formal process of determining if a rollover or a transfer is in the best interest of your customer as is the case when fiduciary investment advice is being furnished.

The customer may/must still make his/her rollover decision. Your customer should still furnish a rollover certification form certifying that he or she is eligible to make the rollover and that he or she understands the rollover instruction is irrevocable. In the case of a transfer, the individual should instruct that he/she wants his/her IRA funds transferred.

ERISA Labor code section 408(a)(3) and Internal Revenue Code section 4975 provide a statutory PT exemption for certain bank time deposits. A bank or similar financial institution is granted an exemption allowing it to offer its own bank deposits as the IRA investment as long as such deposits bear a reasonable interest rate, as long as the bank is a “fiduciary” and the IRA plan agreement contains a provision expressly authorizing such an investment(s). These requirements are met under the CWF IRA plan agreements.

The DOL has issued the revised definition of a fiduciary investment adviser for purposes of applying the prohibited transaction rules when the IRA custodian/trustee has a conflict of interest because it is receiving payments from a third party. In October of 2016 the DOL issued additional helpful guidance titled, “Conflict of Interest Exemptions FAQs”.

In order for a person or an institution to become an investment advice fiduciary, the IRA custodian or trustee must make a certain type of financial recommendation, the IRA owner must accept it and the IRA custodian/trustee must receive compensation on account of the recommended advice.

The new DOL rules will almost always never apply when a person instructs to have his or her plan funds or IRA funds rolled over and invested in an IRA comprised of savings or time deposits as offered by the IRA custodian. Why?

Many IRA custodians do not make investment recommendations and many are not paid any compensation. An IRA custodian which is not paid any type of compensation from a third party on account of its IRAs is not impacted by the new DOL rules as long as it (and its personnel) makes no investment advice recommendation.

In Q/A 4 of the DOL FAQs guidance, the IRS makes clear that an individual can make a rollover decision and a rollover contribution without an investment recommendation being made by the IRA custodian. A financial institution does not become an investment advice fiduciary because it executes the transaction directed by the customer. The customer is still able to make his or her own rollover decision.

An IRA custodian is still subject to the standard prohibited transaction rules even though it is not an investment advice fiduciary. The IRA plan agreement should define the duties and rights of the IRA custodian and the IRA owner and what fees, if any, are to be paid to the IRA custodian and how such fees will be paid. Such fees must be reasonable.

The DOL guidance also discussed whether or not referring a person seeking rollover information to an affiliate or another division would be considered rendering fiduciary investment advice. The answer, it is not. Why? A bank’s or another financial institution’s standard marketing of its own products or those of an affiliate or another division does not constitute fiduciary investment advice as long as an investment recommendation has not been made. This means an institution which makes referrals to an affiliate which is a providers of retail non-deposit investment products is not a fiduciary investment adviser since it is not the party making the investment advice recommendation. It may well be the referred-to-party would make a fiduciary investment recommendation and would be a fiduciary investment adviser and the requirements of the Best Interest Contract exemption would need to be met in order that reasonable compensation could be received.

In summary, those banks currently offering only custodial IRAs are allowed to continue their current IRA service model, including accepting rollover and transfer contributions from 401(k) plans, other retirement plans and other IRAs. The IRA custodian must not be paid or receive any compensation from third parties. Any fees paid by the IRA or the IRA owner must be reasonable and must not be a prohibited transaction.