In April, Craig Watanabe, Sr. Compliance Consultant at Core Compliance & Legal Services, Inc. (“CCLS”), hosted an informative webinar, “SEC Expectations for Managing Retirement Accounts.” During the presentation, he discussed important considerations for the now delayed DOL Conflicts of Interest Rule, how the SEC’s ReTIRE Initiative impacts a firm’s compliance program, steps advisers can take to help protect retirement investors, and considerations for aging clients. At the end of the presentation, Mr. Watanabe received some excellent questions from the attendees, so we are sharing some of them below.
Q: I would like to know that we are placing the correct securities in an IRA portfolio. Can you speak about account testing (i.e., if we put an alternative investment in an IRA that has a 2% expense ratio, is that a problem)?
A: The expense ratio of the investment needs to be reasonable as compared to similar investments of the same type. In other words, if 2% is in line with similar type investments, the adviser would have a defensible position as to why he/she believes the amount of the expense ratio is reasonable given the type of investment. However, if similar type investments typically have an expense ratio that is lower, then 2% would be harder to defend. Importantly, comparing expense ratios shouldn’t necessarily be the only determining factor. For account testing, consider whether the adviser is receiving any indirect benefit that may not be received if other similar investments were recommended. Also, look at what other fees are tied to the investment. For example, if the investment is a mutual fund, consider what share class is being sold to the client.
Q: If you manage an IRA account with the client’s trust, combined trading, and you end up putting a fund with liquidity limited to quarters into an IRA, would that be deemed to be an issue?
A: Possibly, but it depends on facts and circumstances. For example, it could be an issue if the fund with limited liquidity impacts the ability to take required minimum distributions.
Q: Are wrap programs suitable for senior investors?
A: Wrap account suitability is dependent on facts and circumstances. A wrap program may be suitable for a senior investor, but it’s important to consider all the fees the client would pay, including the firm’s advisory fees.
Q: Is there any indication as to whether or not the Department of Labor (“DOL”) will amend or repeal the rule?
A: There’s been no indication from the DOL other than what was referenced in their news release issued April 4, 2017, which outlined they intend to complete their review required by President Trump and have a decision by January 1, 2018. Retirement accounts are increasingly scrutinized by regulators.
CCLS helps firms navigate these emerging rules and regulations, identify associated risks and devise a customized action plan for compliance program needs. If you have questions or would like to learn more about designing a compliance program for servicing retirement accounts and senior investors, please contact us at (619) 278-0020 or email us at firstname.lastname@example.org. Thank you.