This series focuses on the DOL’s new fiduciary “rule”, which was effective on February 16. This, and the next several, articles look at the Frequently Asked Questions (FAQs) issued by the DOL to explain the fiduciary definition and the exemption for conflicts of interest.
The DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees) allows investment advisers, broker-dealers, banks, and insurance companies (“financial institutions”), and their representatives (“investment professionals”), to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to retirement plans, participants and IRA owners (“retirement investors”). In addition, the DOL announced, in the preamble to the PTE, an expanded definition of fiduciary advice, meaning that many more financial institutions and investment professionals will be fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.
In April, the DOL issued FAQs that explain the fiduciary interpretation and the conditions of the exemption.
This article discusses FAQ #9, which discusses the relief provided by PTE 2020-02 for compensation resulting from rollover recommendations.
Q9. Does PTE 2020-02 provide prohibited transaction relief for rollover recommendations?
Yes, the exemption provides relief for rollover recommendations that result in prohibited transactions, so long as the exemption conditions are satisfied. In addition to the other conditions, financial institutions must document and disclose in writing the specific reasons that a rollover recommendation is in the retirement investor’s best interest. In doing so, financial institutions should consider the retirement investor’s alternatives to a rollover, such as leaving the money in an employer’s plan and taking advantage of the investment options available in that plan, including available options other than those reflected in the retirement investor’s current plan holdings. Financial institutions and investment professionals are expected to make diligent and prudent efforts to obtain information about the existing employee benefit plan and the participant’s interests in it. See Q15 for more information on the factors to consider in connection with rollover recommendations.
Let’s break this down into steps.
As the FAQ notes, Question and Answer #15 provides more detail about the information to be gathered and evaluated in the fiduciary/best interest process. In a few weeks, we will get to that FAQ.
PTE 2020-02 offers relief from prohibited transactions resulting from recommendations to participants to rollover their accounts into IRAs. However, it does not provide relief from the fiduciary/best interest standard of care. In that case, financial institutions and investment professionals must engage in a prudent process to gather and assess the relevant information. That fiduciary requirement already applies and is not delayed until December 21.
On the other hand, many of the requirements of PTE 2020-02 are, in effect, delayed until December 21, due to the DOL and IRS non-enforcement policy. But, even there, financial institutions and investment professionals must currently satisfy the Impartial Conduct Standards, which are: a best interest standard of care, no more than reasonable compensation, and no materially misleading statements.