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
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.
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.