In November 2023, the U.S. Department of Labor released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers). On March 8, 2024, the DOL sent the final rule to the Office of Management and Budget in the White House.

The first, and current, version of Prohibited Transaction Exemption (PTE) 2020-02 was effective in December 2020. In November of 2023, the DOL proposed amendments to PTE 2020-02 in connection with its proposed regulation expanding the definition of fiduciary advice to retirement investors—private sector retirement plans, participants in those plans, and IRA owners.

The proposed regulation will cause many more people and firms to be fiduciaries when they make “investment” recommendations to retirement investors. (I put the apostrophes around investment because the term, as used in the regulation, includes a range of services and types of properties.)

When an investment recommendation is conflicted (that is, if the recommendation is accepted and implemented, it will financially benefit the advisor or the firm), the financial benefit is prohibited—literally prohibited. However, if there is an available exemption, and if the conditions of the exemption are satisfied, the transaction can proceed and the financial benefit can be retained.

PTE 2020-02, in both its current form and in the proposed amended version, provides relief to broker-dealers, investment advisers, insurance companies, and banks, and to the individuals who act on their behalf. While those representatives may be insurance agents, investment adviser representatives, registered representatives of broker-dealers, or employees, this article uses the term “advisor” for all of those.

The proposed 2020-02 has changes from the current version. Some primarily affect the individual advisors (called “investment professionals” by the DOL) while other primarily affect the firms (called “financial institutions”).

This article discusses the most significant changes that primarily affect the investment professionals.

• • The proposed PTE, unlike the current version, can be used for pure robo advice. The current PTE can only be used for hybrid robo advice where an investment professional in involved. This change will likely increase the range of retirement investors who receive professional fiduciary advice (g., younger investors and/or investors with smaller accounts).
  • The proposal requires that retirement investors be given a written statement of the PTE’s best interest standard of care owed by the advisor (and the financial institution) to the retirement investor. This requirement will usually be satisfied by physical delivery by the advisor in a meeting with the retirement investor. It may have the effect of educating investors about the high standards in the PTE’s best interest rule—which is, in effect, a combination of ERISA’s duty of care (e., the prudent person rule) and its duty of loyalty. It will also encourage advisors to satisfy those duties.
  • Under the proposal, retirement investors must be given a statement of whether the services will be paid for directly or indirectly—for example, through third-party payments (g., front end loads, 12-1b fees).
  • In addition, retirement investors will need to be given a statement that they have the right to additional information, upon request, about cost, fees and compensation. The DOL explains that retirement investors should have the right to that information: “…described in dollar amounts, percentages, formulas, or other means reasonably designed to present full and fair disclosure that is materially accurate in scope, magnitude, and nature, with sufficient detail to permit the Retirement Investor to make an informed judgment about the costs of the transaction and about the significance and severity of the Conflicts of Interest….” While it is likely that only a limited number of investors will actually ask for the information after receiving the statement, advisors and their firms will need to be prepared to provide it upon request. This requires more individualized disclosures (albeit upon request) that some firms now provide or that is required under other disclosure regimes.
  • As under the current PTE, retirement investors must be provided with a written statement of why a rollover recommendation is in the retirement investor’s best interest. However, the proposal adds that the retirement investor must also receive a statement of specific “relevant factors” that the advisor is obligated to consider in developing the recommendation. The DOL provides form language for this disclosure. It includes: the alternatives to a rollover; the fees and expenses in the retirement plan and the recommended account (g., the contemplated rollover IRA); the services and investments in the plan and the recommended account. This will put the retirement investor (e.g., 401(k) participant) on notice that the advisor is required to obtain and consider information about the investments, services and costs in the plan.

  There are other provisions that could affect advisors (e.g., mitigation of compensation incentives), but the compliance burden for those provisions is placed on the firm and not on the advisor. My next article will discuss new provisions in the proposal that will primarily affect financial institutions.

  Concluding thoughts

  Realistically, the “big change” is that more advisors and financial institutions will be fiduciaries under the expanded definition in the proposed regulation. In many cases, their fiduciary recommendations will result in prohibited transactions. In that sense, the most significant change for PTE 2020-02 is not the changes to its provisions, but that many more recommended transactions will need the relief provided by PTE 2020-02.

  The impact on individual advisors—“investment professionals”—appears to be minimal…primarily additional disclosures. Once the disclosures are developed, the new work due to the changes should be largely done. From then on, the disclosures just need to be delivered…and possibly explained.

  The more interesting part is whether the additional disclosures will have any impact on retirement investors or on advisors as they deliver their services. In that regard, I suspect that the most impactful will be the disclosure about the best interest standard of care and the one about the factors to be considered in developing a rollover recommendation.