Pacific Life to DOL: Are You the Rollover Police?

The general counsel for Pacific Life has lasered in on one major life insurer concern about the U.S. Department of Labor’s sales standard proposal: The proposal seems to give DOL new authority to regulate rollovers from 401(k) plans into other investment arrangements.

Officials at the Employee Benefits Security Administration (EBSA) — the DOL arm that oversees 401(k) plans, and other types of retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) — applied their sales standard proposal to 401(k) plan rollovers as a way to narrow the scope of their proposal, and to justify DOL involvement.

Earlier, during the administration of former President Barack Obama, EBSA tried to apply an earlier fiduciary rule effort to all retirement investment arrangements, including just about all indexed annuity sales. Consumer groups and financial planner groups supported that version. Many life insurers and agents opposed that version, arguing that it was unfair to commission-based sales representative compensation systems. The Obama-era version eventually died in court, when the administration of President Donald Trump declined to defend it.

EBSA is now trying to create a financial products sales standard that will respond to financial services companies’ concerns about the Obama-era version.

But Sharon Cheever, Pacific Life’s general counsel, writes in a comment letter on the new proposal that the assertion that DOL has authority over 401(k) plan rollovers needs some attention.

Resources

A copy of the Pacific Life comment letter is available here.
An earlier article about the DOL impartial conduct standards proposal is available here.

Here are three things she says about the DOL proposal in the rollover jurisdiction section of her comment letter.

1. She wants DOL to be clear about the extent of any jurisdiction it believes it has over 401(k) plan rollovers.

Advice about rolling 401(k) plan assets into other arrangements, such as individual retirement arrangements (IRAs), is already subject to the Internal Revenue Code, Cheever writes.

Cheever does not reject the idea that DOL may have jurisdiction over rollovers, but she says the department should talk about about how it defines that jurisdiction.

2. She says DOL officials should limit any jurisdiction that they say they have over ERISA plan rollovers.

The idea that a rollover may be subject to ERISA, not just the Internal Revenue Code, “should be clarified in particular, not to include situations where the participant decides on his or her own to withdraw assets from an employer plan and rollover funds to an IRA recommended by a financial professional,” Cheever writes. “It is important in those situations to distinguish between the recommendation of the rollover itself from the sale and establishment of an IRA

that, if DOL does say it has jurisdiction over 401(k) plan rollovers, it should exclude situations that involve participants deciding on their own to withdrawal funds and put the funds in an IRA.

3. She says DOL needs to be precise because of the nature of rollovers.

“In the vast majority of cases, especially those involving rollovers, the parties do not know where the relationship will go, and certainly the financial professional has not agreed to take on, nor charge for,ongoing investment advice,” Cheever writes. “It is critical that there be certainty during the rollover process, whether an exemption is needed to cover the commission or other compensation paid in connection with the rollover.”

This is especially true when the participant left the employer that sponsors the retirement plan years ago, and the financial professional selling the IRA has no connection with the employer, Cheever writes.