July 2, 2021

Rollover Recommendations: Improving Investment Advice for Workers and Retirees

  

Rollover Recommendations
Improving Investment Advice for Workers and Retirees

On December 18, 2020, The Department of Labor (“DOL”) adopted Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”). PTE 2020-02, called Improving Investment Advice for Workers and Retirees, expands the definition of advice covered under ERISA law to include recommendations about retirement plan rollovers and Individual Retirement Accounts (“IRAs”). PTE 2020-02 went into effect on February 16, 2021, and included a non-enforcement policy until December 20, 2021.

The result of expanding the DOL definition of investment advice to include recommendations to rollover a client's assets from an ERISA sponsored retirement plan to an IRA is significant, as ERISA fiduciaries are prohibited from engaging in transactions where they receive increased compensation as a result of the advice provided, otherwise categorized as “conflicting advice”. There is a myriad of disclosures and policies and procedures that require implementation in order to receive compensation for rollover recommendations.

The DOL has established a Five-Part Test in order to assist advisors in determining whether a recommendation to roll over retirement plan assets into an IRA falls under ERISA. The regulation states that a person provides “investment advice” if he or she: (1) renders advice to a plan or participant as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property; (2) on a regular basis; (3) pursuant to a mutual agreement or understanding; (4) that such advice will be a primary basis for investment decisions; and that (5) the advice will be individualized to the plan or participant.

How does this impact Registered Investment Advisors? Many that once did not offer retirement plan advisory services will now find themselves subject to the ERISA fiduciary standard when providing recommendations to roll over a participant’s retirement plan assets into an IRA. Certain of these requirements and standards were already required under the Investment Advisers Act of 1940 (“Advisers Act”), so the DOL requirements below shouldn’t come as a major surprise. Under the DOL there are requirements to adhere to the following:
  1. acknowledgment from the advisor of their fiduciary status under Title I of ERISA and the Internal Revenue Code;
  2. due diligence and written documentation of the specific reasons that any recommendation to roll over assets (whether from an ERISA plan to an IRA, from one IRA to another IRA, or from one type of account to another (e.g. commission-based account to fee-based account) is in the best interest of the client.
  3. written disclosure to clients that include (i) the scope of the relationship, (ii) all material conflicts of interest, and (iii) the reasons the rollover recommendation is in their best interest;
  4. compliance with the Impartial Conduct Standards which includes (i) provide prudent investment advice, (ii) charge only reasonable compensation, and (iii) avoid misleading statements; and
  5. an annual compliance review with the results in a written report to a Senior Executive Officer of the advisor.
ACKNOWLEDGEMENT OF FIDUCIARY STATUS
The written fiduciary acknowledgment is designed to ensure that the fiduciary nature of the relationship under Title I of ERISA and/or the Code is clear to the advisor, as well as the client, at the time of the recommended investment transaction. This requirement reflects the DOL’s view that parties wishing to take advantage of the broad prohibited transaction relief in the new exemption should make a conscious up-front determination that they are acting as fiduciaries; tell their client’s that they are rendering advice as fiduciaries; and, based on their decision to act as fiduciaries, implement and follow the exemption’s conditions.

DUE DILIGENCE AND DOCUMENTATION
There are a number of specific considerations to be reviewed and compared before executing any action. Considerations include the following:
  • The range of investment options between the existing plan and proposed rollover account, and which is in the client's best interest.
  • A comparison of the fees and expenses associated with the existing plan and the proposed rollover account.
  • What, if any, tax implications exist for the individual client should they choose to accept rolling over their ERISA plan assets into an IRA?
  • Are there services that the client would receive from the existing plan that would benefit them that they would not receive in a new account?
  • Is the client's age a factor? Are they planning to retire early or do they plan to work past the age where Required Minimum Distributions (RMD’s) will come into play?
  • ERISA plans typically have unlimited protection from creditors, whereas IRA assets are only protected in bankruptcy proceedings. Is this a concern for the client?
Advisors are expected to make diligent and prudent efforts to obtain information about the existing employee benefit plan and the participant’s interest in it. The focus should not be solely based on the client’s current holdings, but instead should consider the overall options available in the plan. Consideration of factors like the long-term impact of any increased costs, why the rollover is appropriate (notwithstanding any additional costs), and the impact of any economic investment features that exist are critical components in determining suitability with each individual client. In the event that a client won’t provide the information, even after an explanation of its significance, and the information is not otherwise readily available, the institution and professional should make a reasonable estimation of expenses, asset values, risk, and returns based on publicly available information. Documentation should be maintained whenever assumptions are being used and their limitations.

WRITTEN DISCLOSURES
Prior to engaging in a transaction under the exemption, the Advisor must provide its clients a written description of the Advisor’s material conflicts of interest arising out of the services it provides and any recommended investment transaction. These conflicts must include those associated with proprietary products, payment from third parties, and compensation arrangements for both the advisor and its investment advisor representatives. Disclosures with material omissions will be considered inaccurate and will not satisfy the exemption. It should be further noted that the disclosure cannot be a “check-the-box” activity. As it pertains to the written disclosure of the recommendation, advisors should consider, discuss, and document the alternatives to executing a rollover. Those alternatives include leaving the money in the existing plan, rolling the money into a new employer-sponsored plan, or withdrawing money from the ERISA plan completely.

Disclosures with material omissions will be considered inaccurate and will not satisfy the exemption. It should be further noted that the disclosure cannot be a “check-the-box” activity. As it pertains to the written disclosure of the recommendation, advisors should consider, discuss, and document the alternatives to executing a rollover. Those alternatives include leaving the money in the existing plan, rolling the money into a new employer-sponsored plan, or withdrawing money from the ERISA plan completely.

IMPARTIAL CONDUCT STANDARDS
The cornerstone of the exemption is the requirement that advisors adopt and adhere to the Impartial Conduct Standards. The essence of these standards should come as no surprise, as they speak directly to the duty of care and loyalty that should be paid to all clients and transactions at all times as an advisor. Those standards are outlined below:
  • Investment advice must be in the best interest of the client and must not place any other interests ahead of that interest.
  • Compensation paid for such advice must be reasonable.
  • Statements made with respect to the transaction must not be materially misleading.
ANNUAL REVIEW
The Advisor’s annual review should be designed to assist the firm in detecting and preventing violations of, and archiving compliance with, the impartial conduct standards and their policies and procedures. The results of the review must be reduced to a written report that is submitted to one of the institution's senior executive officers. The officer must make certain certifications related to their review of the report. The report, certification, and supporting data must be retained for six years and provided to the DOL within 10 business days of a request.


How will the DOL Oversee Compliance with PTE 2020-02?

To the extent that advisors experience violations of the exemption, PTE 2020-02 contains a self-correction procedure for violations of the conditions under the exemption. To self-correct, an advisor must:
  1. Determine that the violation did not result in investment loss, or it must make the client whole for any such loss;
  2. Correct the violation and notify the DOL within thirty (30) days of correction;
  3. Complete the correction no later than ninety days after the advisor learned of (or reasonably should have learned of) the violation; and
  4. Notify the person(s) responsible for conducting the retrospective review during the applicable review cycle so the correction can be included in the report.

NEXT STEPS: We are currently building various tools embedded within AdvisorCloud360® to assist with these requirements. In the meantime, we strongly encourage advisors to adopt policies and procedures to help with their due diligence and documentation efforts, as well as ongoing disclosure requirements.

If you’d like to receive more information on the new DOL rule, please reach out to AdvisorAssist at info@advisorassist.com.



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