DOL Provides Practical Advice on Applying PTE 2020-02 to Rollover Recommendations | Faegre Drinker Biddle & Reath LLP
As described in our recent blog post, the Department of Labor (“DOL”) recently published FAQs guidance to answer questions regarding the practical application of PTE 2020-02, Improving investment advice for workers and retirees. Recommendations for transferring assets from an employee benefit plan to an IRA are at the heart of the DOL and these FAQs. This blog post discusses advice from the DOL regarding rollover recommendations under PTE 2020-02.
In 1975, the DOL issued a regulation which adopted a five-part test to determine whether investment advice is “fiduciary investment advice” and would qualify an investment professional as a fiduciary under ERISA. (the “1975 labor regulations”). The five-part test is satisfied if an investment professional: 1) advises a plan, plan trustee, or IRA owner about the value of securities or other property, or makes recommendations as to the advisability of investing, buying or selling securities or other property; 2) on a regular basis; 3) under a mutual agreement, arrangement or understanding with the Plan, the Plan Trustee or the Owner of the IRA; 4) where the advice will serve as the main basis for investment decisions regarding the assets of the plan or IRA; and 5) where advice will be individualized based on the particular needs of the plan or the ERI.
Historically, practitioners have argued that renewal recommendations would not be fiduciary investment advice under the 1975 Labor Regulations, as this is often a single, low-key recommendation rather than a series. financial investment advice offered on a regular basis. However, the DOL clarifies in the FAQ that rollover recommendations may be considered “fiduciary advice” in certain circumstances and that PTE 2020-02 will provide relief for prohibited transactions resulting from such advice.
When the rolling tips are “fiduciary investment tips”
The DOL recognizes that a single and separate body of advice on transferring assets from an employee benefit plan to an IRA would not meet the definition of “trust investment advice”. However, if the rollover recommendation comes from an investment professional who already has an advisory relationship with the retirement investor regarding retirement assets OR if the rollover recommendation comes from an investment professional At the start of an advisory relationship with the expectation that he or she will provide regular investment recommendations regarding an IRA, the rolling recommendation becomes an investment board fiduciary.
Factors to be considered by an investment professional when issuing a rollover recommendation under the 2020-02 TEP
As noted in our previous blog post, PTE 2020-02 requires investment professionals to consider and document their analysis of why the roll 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:
- Alternatives available to the retirement investor, other than a rollover, including leaving the money in the qualifying retirement plan;
The DOL states that the investment professional should not only consider the current investment mix of the retirement investor, but should also consider other investment options as part of the plan.
- Fees and expenses associated with both the qualifying pension plan and the IRA;
The DOL says the analysis should include consideration of the long-term impact of increased costs and the impact of “economically important investment characteristics such as redemption schedules and the cap on index annuities. and participation rates ”.
- If the employer pays some or all of the administrative expenses of the qualifying pension plan; and
- The different services and investments available under the Qualified Retirement Plan versus the IRA.
The DOL states that investment professionals and financial institutions should be able to gather information regarding the pension investor’s qualifying pension plan from the member opinions provided by the pension investor (such as ‘requires work regulations 2550.404a-5) or the plan’s most recent Form 5500. Reasonable estimates can be made if this information is ultimately not available (after a diligent and prudent effort), provided that these assumptions are documented for the retired investor.
PTE 2020-02 Impact on the advisory opinion of DOL 2005-23A
The FAQ indicates whether practitioners can continue to rely on historical guidance regarding fiduciary investment advice with respect to rollover recommendations. The DOL states that, to the extent that a rollover recommendation involves advice on the sale, withdrawal or transfer of plan assets, it is considered a “board of trustees” to the extent that other regulatory requirements pertain to the plan. of fiduciary investment advice are satisfied. Therefore, says the DOL, the information in Deseret’s letter, Advisory Opinion 2005-23A, was incorrect. To paraphrase briefly, Deseret’s letter stated that rollover recommendations (even if paired with advice on investing in the Rolling IRA) would generally not constitute fiduciary investment advice, unless they were not. be provided by a party who was already a plan sponsor or other trustee.
However, the DOL indicates that due to its enforcement policy, it will not pursue complaints 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 renewal recommendations that would have been considered non-fiduciary under Advisory Opinion 2005-23A.