As described in our recent blog post, the Department of Labor (“DOL”) recently issued guidance in the form of FAQs to address questions concerning the practical application of PTE 2020-02, Improving Investment Advice for Workers & Retirees. Recommendations regarding the rollover of assets from an employee benefit plan to an IRA are a key focus of the DOL and of these FAQs. This blog post discusses the guidance the DOL offers with respect to rollover recommendations under PTE 2020-02.
In 1975, the DOL issued a regulation that adopted a five-part test for determining when investment advice is “fiduciary investment advice” and would qualify an investment professional as a fiduciary under ERISA (the “1975 Labor Regulation”). The five-part test is met if an investment professional: 1) renders advice to a plan, plan fiduciary or IRA owner 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, arrangement, or understanding with the plan, plan fiduciary or IRA owner; 4) where the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) where the advice will be individualized based on the particular needs of the plan or IRA.
Historically, practitioners have argued that rollover recommendations would not be fiduciary investment advice under the 1975 Labor Regulation because they are often a single and discrete recommendation rather than a series of financial investment advice offered on a regular basis. However, the DOL clarifies in the FAQs that rollover recommendations can be considered “fiduciary advice” under certain circumstances and that PTE 2020-02 will provide relief for prohibited transactions resulting from such advice.
When Rollover Advice is “Fiduciary Investment Advice”
The DOL acknowledges that a single, discrete instance of advice to rollover assets from an employee benefit plan to an IRA would not meet the definition of “fiduciary investment advice.” However, if the rollover recommendation comes from an investment professional who has an existing advice relationship with the retirement investor regarding retirement assets OR the rollover recommendation comes from an investment professional at the beginning of an advice relationship with the expectation that he or she will regularly provide investment recommendations with respect to an IRA, the rollover recommendation becomes fiduciary investment advice.
Factors for an Investment Professional to Consider in Giving a Rollover Recommendation under PTE 2020-02
As noted in our prior blog post, PTE 2020-02 requires investment professionals to consider and document their analysis as to why the rollover recommendation is in the best interest of the retirement investor. The DOL provides a list of suggested factors for an investment professional to consider in this analysis:
- The alternatives available to the retirement investor, other than a rollover, including leaving the money in the qualified retirement plan;
The DOL indicates that the investment professional should not just consider the retirement investor’s existing investment allocation and should also consider the other investment options under the plan.
- The fees and expenses associated with both the qualified retirement plan and the IRA;
The DOL indicates that the analysis should include consideration of the long-term impact of increased costs and the impact of “economically significant investment features such as surrender schedules and index annuity cap and participation rates.”
- Whether the employer pays for some or all of the qualified retirement plan’s administrative expenses; and
- The various services and investments available under the qualified retirement plan compared to the IRA.
The DOL indicates that the investment professional and financial institutions should be able to gather information regarding the retirement investor’s qualified retirement plan from participant notices provided by the retirement investor (as required under Labor Reg. 2550.404a-5) or the plan’s most recent Form 5500. Reasonable estimates can be made if such information is ultimately unavailable (after a diligent and prudent effort), so long as such assumptions are documented for the retirement investor.
PTE 2020-02 Impact on DOL Advisory Opinion 2005-23A
The FAQs provide some direction as to whether practitioners can continue to rely on historical guidance regarding fiduciary investment advice with respect to rollover recommendations. The DOL indicates that because a rollover recommendation involves advice as to the sale, withdrawal or transfer of plan assets, it is considered “fiduciary advice” to the extent that other regulatory requirements for fiduciary investment advice are satisfied. Therefore, states the DOL, the guidance in the Deseret Letter, Advisory Opinion 2005-23A, was incorrect. To briefly paraphrase, the Deseret Letter indicated that rollover recommendations (even if coupled with advice about investments in the rollover IRA) would not typically constitute fiduciary investment advice, unless provided by a party who was already a plan official or other fiduciary.
However, the DOL indicates that as a matter of enforcement policy, it will not pursue claims of breaches of fiduciary duty or prohibited transactions for the period between 2005 (when Advisory Opinion 2005-23A was issued) and February 16, 2021 (when PTE 2020-02 took effect), for rollover recommendations that would have been considered non-fiduciary under Advisory Opinion 2005-23A.