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Three Ways the SECURE Act Will Impact Clients with Stretch IRAs

In late May, the House of Representatives overwhelmingly passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation, however, has since stalled, leaving many advisers wondering if the Act’s numerous retirement provisions will ever become a reality. First, we will offer a brief update on the current status of the legislation followed by a review of one of the most controversial provisions of the SECURE Act—the future of the Stretch IRA.

Given the many popular provisions of the SECURE Act, including multiple employer pension (MEP) reform and safe harbor provisions for guaranteed income solutions inside of Defined Contribution plans, there is little doubt the legislation will pass the Senate. In order for a final vote to happen, however, the legislation first needs to be brought to the floor. These procedural requirements are where things begin to get complicated. Senate leader Mitch McConnell (R-Ky.) has been reluctant to bring legislation to the floor passed by the House of Representatives in an effort to stymie the Democratic agenda. Also, a few key Senators including Ted Cruz (R-Texas) and Pat Toomey (R-Pa.) are holding out over provisions tucked into the SECURE ACT related to 529 college saving plans and taxation of benefits received by Gold Star families. Of course, neither of these provisions have anything to do with retirement planning.

So, what does this uncertainty in the Senate mean for advisers? At this point, it is still too early to make any substantive recommendations regarding client financial plans, but familiarizing clients with the potential changes is still a best practice. The reasons are: clients will be better prepared to reassess their finances if the legislation does become law, and reviewing these provisions is the perfect opportunity for advisers to showcase their expertise. Regarding the Stretch IRA provision, the three key items advisers need to know are:

  • New 10-year period for non-spouse beneficiaries. Under the SECURE Act, rather than having their annual distributions based on their single life expectancy, non-spouse beneficiaries would have 10 years to draw down an inherited IRA.
  • Existing stretch IRAs are grandfathered. The new rules would only apply to IRA owners who pass away after December 31, 2019. In other words, existing Stretch IRAs will be grandfathered.
  • There are exceptions to the new rules. The SECURE Act will provide relief from the regulations outlined above to beneficiaries who are minors, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner. Further, spousal beneficiaries will still be eligible to take annual distributions based upon their single life expectancy—a handy provision for spouses under age 59½ who may need income.

With Congress returning from August recess, attention will again shift to Washington. Advisers are encouraged to closely monitor developments regarding the SECURE Act, and to keep clients informed.

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a professional adviser. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.

Matt Sommer

Matt Sommer is senior managing director, retirement strategy group at Janus Henderson Investors. In this role, he leads the defined contribution and wealth adviser services team. His expertise covers a number of areas, including regulatory and legislative trends, practitioner best practices and financial and retirement planning strategies for high-net-worth clients. 


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States Attempt to Pick Up Slack of Fiduciary Rule Defeat, Reg BI

The department of Labor’s fiduciary rule was vacated by a U.S. circuit court in 2018. Some states are looking to fill the hole left by that defeat—and fill what they feel are gaps in the SEC’s Regulation Best Interest—with their own state-level fiduciary rules for financial planners and broker-dealers.

Some states had already begun the process of implementing their own rules prior to the fiduciary rule defeat. While Nevada, New York, Massachusetts, Connecticut, Illinois, and Maryland have attempted to implement their own fiduciary rules, New Jersey has been stealing headlines recently, as it recently closed the comment period on its proposed rule.

The Financial Advisor IQ article, “Advocates Clash at New Jersey Fiduciary Rule Hearing,” reported that a final New Jersey rule is expected to be released sometime in the fall.

“State-level fiduciary efforts have swelled up in response to dissatisfaction with the SEC’s new standard of conduct for broker-dealers, Regulation Best Interest,” reporter Ian Wenik wrote in Financial Advisor IQ.

These state-level fiduciary rules could serve as bellwethers for other states and could reach well beyond state lines and impact your firm. Forbes reported, in an article titled “What a New Jersey State-Level Fiduciary Rule Might Mean for Brokers,” that the New Jersey rule would impose a uniform best interest standard on RIAs and broker-dealers alike.

Proponents of the New Jersey rule say it picks up the slack left by the SEC’s recently passed Reg BI, which they say does not go far enough to protect investors. Opponents claim the rule would be at odds with Reg BI and would create confusion for RIAs and broker-dealers that would ultimately end up harming investors. An InvestmentNews editorial noted, “Whether broker-dealers or investment advisory firms like it or not, states have the right to propose such rules.”

Ana TL Headshot_Cropped

Ana Trujillo Limón is senior editor of the Journal of Financial Planning and the editor of the FPA Practice Management Blog. Email her at alimon@onefpa.org, or connect with her on LinkedIn


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DOL Deconstructed: Regulations, Guidance and Suggestions on Documenting Alternative Investment Due Diligence

With phase one of the Department of Labor’s fiduciary rule having gone into effect on June 9, 2017, financial advisers must comply with “impartial conduct standards,” which require that advice be in the best interest of retirement investors.

The best interest standard has two primary components: prudence (professional standard of care), and loyalty (based on the interests of the customer rather than the adviser or firm). Advisers are also required to charge clients no more than reasonable compensation. The final phase of the rule is set to go into effect on January 1, 2018. See the DOL’s Transition Period Q&A here.

For most advisers, compliance with the impartial conduct standards is simple—most already give advice that is in the best interest of their clients. What may not be so simple is documenting adherence to the standards now that they will be more scrutinized. In this article, we will discuss the current regulation and offer guidance around alternative investment documentation.

Key Language on Documentation from the Regulation and Guidance

Here is a list of key language and documentation you should familiarize yourself with:

DOL Fiduciary Rule (client interactions): Broker dealers, financial advisers and registered investment advisers (RIAs) “must document why recommendations were in a client’s best interest,” including, but not limited to, the type of account used, the products that are recommended, and why the recommendation was in the client’s best interest at the time it was made. Read more from the Department of Labor here.

NASD Notice to Members 03-71 (non-conventional investments): In addition to establishing written procedures for supervisory and compliance personnel, “members must also document the steps they have taken to ensure adherence to these procedures.” Read the full FINRA notice here.

FINRA Regulatory Notice 10-22 (Regulation D offerings): In order to demonstrate that it has performed a reasonable investigation, a BD “should retain records documenting both the process and the results of its investigation of Reg D offerings.” Read the full FINRA notice here.

What to Document in Alternative Investments Due Diligence?

The process. Document your processes for identifying alternative investment opportunities. Keep a file of the list of any and all sectors, asset classes, products, and managers reviewed. Documentation tip: Keep a log of any screens you have run to narrow the universe of investment opportunities available to your clients, as well as a log of any training or education you have completed while conducting your research.

Fees, characteristics, risks and rewards. Ensure documentation of how you are educating yourself on the strategies considered. Most importantly, you’ll want to document your review of a product’s fees (especially in relation to other similar products), investment characteristics, key risks and rewards and how management intends to meet the product’s objectives. Keep an initial file and ensure you have a way to track the most up-to-date key documents and interviews with managers. Key documents include any fee comparison reports, the offering documents, performance information, brochures, quarterly/annual reports, ADVs, and any other available data. Documentation tip: Try to meet or speak with key decision-making personnel for the investment manager if possible and have them explain how they intend to meet their stated investment objectives.

Operational due diligence and analysis. Document your audit of a firm’s operational structure, adherence to compliance requirements, background checks and any red flags that may arise. Many advisers and broker-dealers rely on third-party due diligence providers for this step. Documentation tip: While it is common for third-party diligence firms to be utilized for this important step in the due diligence process, it is important to remember that you may not rely solely on a third party for due diligence. You must be familiar with the content of any third-party reports and any red flags highlighted in these reports. Document the follow-up on red flags and any conclusions.

Ongoing monitoring. Due diligence does not stop with an initial review. It is important to remember that a sound due diligence process means continually performing analysis on each manager, updating your key documents on a quarterly basis, conducting formal meetings and monitoring the portfolio for any changes or red flags. Documentation tip: Document any and all ongoing due diligence and ensure you are set up to receive notices of important events for alternative investment programs and managers.

Summary

Keep hard copies, use electronic storage and/or consider using a third party to track training and education, due diligence, research and compliance. Keep an easily accessible trail of your due diligence efforts, whether electronically or on paper, to easily demonstrate what you have done including not only the results of your due diligence but the process you followed. (Note: SEC Rules17a-3 and 17a-4 stat that during the first two years, records must be kept in a readily accessible place. Most documents must be kept for up to six years, depending on the document, although formation and organizational documents must be kept indefinitely). Always remember, if it isn’t documented, it didn’t happen!

Laura Sexton
Laura Sexton is senior director of program management at AI Insight. She holds her bachelor’s degree in education from Purdue and has held the FINRA Series 7, 24 and 66 securities and life insurance licenses. She resides in Massachusetts with her husband and two children. Visit her on LinkedIn.

 

Editor’s note: a version of this post first appeared on the AI Insight blog in March 2017.