Background

DOL’s Prohibited Transactions Exemption (PTE) 2020-02 (Improved Investment Advice for Workers and Retirees) allows investment advisers, broker-dealers, banks and insurance companies (“financial institutions”) and their representatives (“Investment Professionals”), to receive conflicting compensation resulting from non-discretionary fiduciary investment advice to ERISA pension plans, participants (including rollover recommendations), and IRA owners (all called “retirement investors”).

In addition, in the preamble to the PTE, the DOL announced an expanded definition of fiduciary advice, which means that many more financial institutions and investment professionals are fiduciaries for their recommendations to pension investors and, by therefore, will need the protection afforded by the exemption.

A rollover recommendation will generally be non-discretionary fiduciary advice and will result in a financial conflict of interest that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is non-discretionary, PTE 2020-02 will provide relief, but only if all of its conditions are met.

Most of my rolling articles have been in the context of ERISA 401(k) and 403(b) plans, i.e., participant-directed retirement plans. However, the fiduciary definition also covers rollover recommendations to other types of plans. This article discusses rollover recommendations made to members of defined benefit pension plans.

The preamble to PTE 2020-02 explains the DOL’s interpretation of the fiduciary rule as applying to Plan-to-IRA rollover recommendations (as well as other retirement account-related recommendations). For example, where an investment professional recommends a Rollover Plan-to-IRA and provides ongoing financial advisory services to the Rollover IRA, this would be considered fiduciary advice for the Rollover (under the expanded interpretation of the DOL). The recommendation would result in a prohibited trust transaction because the recommendation, if accepted, will result in the trustee receiving a financial benefit (for exampleIRA rollover fees or commissions).

The PTE describes the following recommendations as rolling recommendations: any asset turnover recommendations from shot to shot another diet or an IRA as defined in Section 4975(e)(1)(B) or (C) of the Code, an IRA as defined in Section 4975(e)(1)(B) or (C) of the Code to a plan, from one IRA to another IRA, or from one type of account to another (for example, from a fee-based account to a fee-based account–account based)….

For the purposes of this article, the question is: what is the definition of a “plan” for bearing recommendations?

As you’d expect, the DOL answers the question (although the answer is a little hard to find). In footnote 15 of the preamble to the PTE, the DOL states: For the purposes of any transfer of assets from a Title I plan to an IRA described in this preamble, the term “plan” includes only an employee retirement plan described in Section 3(2) of ERISA or an scheme described in Section 4975 of the Code. (e)(1)(A), and the term “IRA” includes only an account or annuity described in Section 4975(e)(1)(B) or (C) of the Code.

It takes us into research that lawyers might love, but real people hate. (For example, a rational person might ask, “Why can’t they just tell us what they want to say?”) So we go cross-referencing.

If you turn to ERISA and search for section 3(2), you will find the following:

(2)(A) Except as provided in sub-paragraph (B), the terms “employee pension plan” and “retirement plan” means everything plan, fund or program that has been or will be established or maintained by a employer or by a employee organization, or both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund or program—

(I) provides retirement income to employees, or

(ii) results in deferred revenue of employees for the periods extending until the termination of the sheltered employment or beyond, regardless of the method of calculation of the contributions paid to the scheme planthe method of calculating benefits under the plan or the profit allocation method of the plan.

If you’re not used to reading technical regulatory language like this, don’t worry. Here is the lay version: any private sector pension plan set up by an employer for its employees.

What about cross-reference to the Internal Revenue Code? Here is what he says:

(e) Definitions

(1) Plan

For the purposes of this section, the term “plan” means-

(A) a trust described in section 401(a) which is part of a plan, … who trust or plan is tax exempt under Section 501(a),…

In short, this means that any qualified plan is a “plan” for rolling purposes.

So where does this leave us? All ERISA-regulated pension plans and all qualified plans are “plans” for rollover purposes. This includes, for example, 401(k) plans, private sector 403(b) plans, profit sharing plans, ESOPs, defined contribution pension plans, cash balance plans, and pension plans. defined benefit pension.

Final Thoughts

Brokers, investment advisors, banks and trust companies, and insurance companies need to be aware of this and have rollover recommendation solutions specifically designed for group plans such as defined benefit pension plans.

My experience so far is that while many companies have rollover strategies for member-managed plans, they don’t for group plans. The differences in the information needed and the analytical approach are day and night. But, in all cases, the recommendation must be in the best interest of the participant.