Labor Department cracking down on broker-driven rollovers

With the Labor Department stepping up scrutiny of conflicts of interest and fee disclosures, broker-dealers are becoming concerned about how their reps handle rollover assets from 401(k) plans.

The majority of small 401(k)s — those with $5 million or less — are sold by brokers and advisers.
Brokers who work with plan participants often encourage them to roll over their 401(k) assets into an individual retirement account with the broker’s firm upon retirement, noted Jason C. Roberts, a partner at Reish & Reicher.

But under current Labor Department rules, if the adviser is also acting as a fiduciary to the plan, he or she cannot encourage a participant to roll over assets to the broker-dealer, because that is technically considered a prohibited transaction, Mr. Roberts said.

This has been the case for years, but it’s just now that the department is enforcing this regulation aggressively, he said.

“Between 70% and 80% of my broker-dealer clients have never seen the DOL in their offices,” Mr. Roberts said. “And now within 60 to 90 days of a Securities and Exchange Commission exam, they are getting calls from the DOL.”

Reish & Reicher is recommending that broker-dealers encourage their 401(k) plan sponsor clients to outsource the fiduciary advice to a third party, freeing up their brokers to collect rollover assets, Mr. Roberts said.

“They are taking steps to further insulate themselves from providing advice so that their reps can collect these rollover dollars,” Mr. Roberts said. “Outsourcing solves this issue.”