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Three’s A Crowd Regarding IRA Rollovers

By W. Andrew Larson, CPC

The Securities and Exchange Commission (SEC) finalized new rules (known as Regulation Best Interest or Reg. BI) that address, in part, IRA rollovers for broker-dealers.  This commentator questions the wisdom of inserting now a third governmental agency into the retirement space, which, historically, was overseen by the IRS and Department of Labor (DOL). It seems that if Congress had wanted the SEC in this regulatory mix it would have said so in the first place. I wonder if the SEC has such ample resources it feels impelled to expand their regulatory purview or if, perhaps, this is an attempt to obtain additional funding for these new endeavors.

Under Reg. BI, broker-dealers are held to a best interest standard when making a recommendation to a retail customer. In this context, a “retail customer” does not include a plan sponsor, but it does include plan participants with regard to recommendations to take distributions or roll over assets to IRAs. Arguably, advisors are required to demonstrate how they arrived at a best interest finding and recommendation. Effectively, this regulation is a watered-down version of the vacated DOL fiduciary rules and, while the objective of protecting consumers is admirable, my concern is the propriety of injecting another federal agency into the arena of Employee Retirement Income Security Act (ERISA) enforcement.

The General Obligation of Reg. BI has four components:

  • Disclosure of the relationship and fees (Disclosure Obligation);
  • Duty of care (Care Obligation),
  • Mitigation and disclosure of conflicts (Conflicts of Interest Obligation); and
  • Establishment, maintenance and enforcement of policies and procedures (Compliance Obligation).

The SEC has noted certain considerations are not considered determinative in and of themselves to warrant a rollover recommendation. For example, having more investment elections available within an IRA vis a vis the qualified plan is not considered enough rationale to conclude a rollover would be in the best interest of the investor according to the SEC.

Factors to consider when contemplating a rollover should include items such as, but not limited to, the following:

  • Fees and expenses;
  • Level of service available;
  • Availability of retirement income products and other investment options;
  • Ability to take penalty free withdrawals;
  • Protections from creditors and legal judgments;
  • Administrative convenience;
  • Beneficiary considerations (some qualified plans don’t allow the full range of beneficiary options permitted under statute);
  • Availability of net unrealized appreciation (NUA) opportunities with employer stock,
  • After-tax contributions and the potential for Roth conversions;
  • Required minimum distribution (RMD) requirements (e.g., Designated Roth accounts in 401(k) plans remain subject to RMD requirements); and
  • Any special features of the existing account.

Ultimately, I believe Reg. BI will result in a more nuanced IRA rollover recommendation process where “all or nothing” rollover events will become less common. Future recommendations involving plan distributions and rollovers will require advisors to have a greater understanding of their customers’ retirement plans, and the options and choices among the various money types within the plans. For example, 401(k) arrangements are highly variable by sponsor, each having multiple money types, features and provisions. Clearly, the first step in the Duty of Care process is having a thorough understanding of the distributing plan’s applicable provisions and features, and securing documentation that would support the basis for making any recommendations. But sources for detailed plan information are limited.

Retirement Learning Center (RLC) has a library of over 6,000 plan documents it has analyzed and summarized as “Plan Snapshots,” which can give advisors important plan information necessary to feed the Duty of Care process. Use of RLC’s plan information not only saves time but can be part of the crucial documentation necessary to support a recommendation.

With oversight from the IRS, DOL and now SEC, the rollover landscape is changing and will result in advisors taking a more subtle, thoughtful and documented approach with investors when recommending retirement plan distributions and rollovers.


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What is a 10b5-1 plan?

“Is a 10b5-1 plan a type of qualified retirement plan?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Kansas is representative of a common inquiry related to trading securities.

Highlights of the Discussion

No, it is not a “qualified plan” in the sense of a 401(k) or profit sharing plan, which meets requirements for favorable tax treatment under Internal Revenue Code 401(a). A 10b5-1 plan is a buy/sell agreement for securities that meets the requirements of the Securities Exchange Commission’s Rule 10b5-1 related to “insider trading.”

Legal insider trading occurs when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies and report their trades to the SEC. Illegal insider trading refers to an insider using material, nonpublic information to buy or sell securities to his or her  advantage.  A 10b5-1 plan is a written contract between an insider and his or her broker to buy or sell company stock at a time when the insider is not in possession of any restricted information related to the stock. A 10b5-1 plan is a way for insiders to trade company securities and minimize legal exposure by giving them an affirmative legal defense. An affirmative defense is not a safe harbor nor will it protect a person from allegations of wrongdoing. It allows a person to refute allegations of wrongdoing.

In order for a 10b5-1 plan to serve as a defense against charges of insider trading, it must meet the following criteria:

  1. Entered into in good faith without intent to abuse Rule 10b5-1;
  2. Adopted when the individual trading the security was not aware of any material, nonpublic information;
  3. The terms of the plan contains a pre-set formula for determining the amount, price and date of transactions;
  4. The individual subsequently cannot affect criterion #3 once it is in place;
  5. The purchase or sale of the security was made according to the plan.

Anyone can adopt a 10b5-1 plan, although it is generally used by large stock holders, directors and officers of the company. A company’s internal trading policies should address 10b5-1 plans, if they are offered.


Erin, an executive at Enrun Corporation, executes a written, one-year contract between herself and her broker that instructs the broker to sell 10,000 shares of Enrun on the first trading day of each month and twice as many shares (20,000) if the price has increased by 5% since the prior sale date. On the surface, this contract, generally, would meet the requirements to be a 10b5-1 plan.


A properly executed 10b5-1 plan can stand as an affirmative defense against allegations of insider trading for someone who is in a position to have material, nonpublic information. Extreme care should be used when establishing and using such plans as they are not infallible, however. Consult a legal expert.

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