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Financial Planning > Tax Planning

Ed Slott: Yes, IRA Rollovers Are Advice Under New DOL Fiduciary Rule

By Melanie Waddell

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What You Need to Know

  • That means advisors must know the tax rules for each rollover option, the IRA expert tells ThinkAdvisor.

Advisor recommendations on IRA rollover transactions are fiduciary advice under the Labor Department’s proposed new fiduciary rule, and “would fall within the scope of investment advice,” according to Ed Slott of Ed Slott & Co.

IRA rollovers “will continue to be ’among the most, if not the most, important financial decisions that plan participants and beneficiaries, and IRA owners and beneficiaries are called upon to make,’” Slott told ThinkAdvisor Tuesday in an email exchange, citing the text of Labor’s proposed rule, released Tuesday morning.

Labor, Slott said, “is putting rollover advice right up there with investment advice.”

Labor’s proposal is officially called the Retirement Security Rule: Definition of an Investment Advice Fiduciary.

Taxes Are Key

Labor’s new rules “mean that advisors need to know the tax rules on each option when rolling over 401(k) plan funds to an IRA, or when not to do the rollover, or when to take a lump-sum distribution, which for example means being educated on the NUA (net unrealized appreciation) tax rules when there is appreciated stock in the 401(k) that may qualify for the NUA tax break,” Slott warned.

“An advisor who rolls those funds over to an IRA without analyzing the NUA option could end up losing that tax break, because they were just not aware of it,” Slott relayed.

“That’s just one example of many where an uneducated advisor could inadvertently run afoul of these DOL rules and be held responsible, for thousands or hundreds of thousands of dollars lost to taxes due to poor planning,” Slott continued.

As in all the prior iterations of Labor’s fiduciary rule, “when it comes to IRA rollovers — it is imperative that advisors be aware of all possible rollover options and have a process of explaining and reviewing the pros and cons of each option to their clients,” Slott said. “Only then can the client be served in their best interest.”

While DOL’s rules “are meant to somehow eliminate advisors who may be bad apples and put their own profit ahead of what’s best for their clients,” Slott added, “that is not most advisors.”

Most advisors, Slott said, want to do “what’s best for their clients. The problem is though, that wanting to do what’s right and having the knowledge to do that are both necessary.”

Labor’s new rules, Slott added, “stress that advisors need to produce evidence that they have gone through a process to help clients make the rollover choice that is best for them. The best option will depend on each client’s particular financial and personal facts and circumstances.”

Pictured: Ed Slott. Photo: Natalie Brasington

Melanie Waddell

@Think_MelanieW

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