The stay of the effective dates of the amended fiduciary regulation and amended exemptions means that the “old” DOL fiduciary regulation (the 5-part test) and the existing exemptions continue in effect indefinitely.

My last post, Fiduciary Rule 47, discussed SEC and SEC staff guidance on recommendations to transfer IRAs. This post is about the DOL’s likely interpretation of how the existing 5-part fiduciary definition applies to IRA transfer recommendations.

In a nutshell, recommendations to transfer IRAs (that is, either individual retirement accounts or individual retirement annuities) are, in some cases, likely to be considered fiduciary recommendations by the DOL under its “old”, and continuing, fiduciary definition—the 5-part test. Of the 5 parts of the test, the part that is the most often relied on to avoid fiduciary status is the “regular basis” requirement. In other words, if an advisor (as a representative of a broker-dealer or an investment adviser) or an insurance producer doesn’t provide recommendations to an IRA owner on a regular basis, the advisor or producer will not be a fiduciary. And, while we don’t quite know what “regular basis” means—for example, it could be periodic, but it wouldn’t be episodic—we can assume that, where the relationship contemplates that recommendations will be provided on an ongoing basis, the requirement is satisfied and, for our purposes, that the advisor or agent is a fiduciary.

For the rest of this article, I will discuss recommendations to transfer IRAs, as accounts, rather than as annuities…just because it is easier to write and read that way. However, where a “securities” annuity (e.g., a variable annuity or a registered index-linked annuity) is included as a part of an overall investment arrangement that receives advice on a regular basis (for example, in an IRA brokerage account), the advisor could provide advice on a regular basis and thereby be a fiduciary for that purpose. It is less likely, though, that for an insurance-only annuity recommended by an insurance producer, advice would be provided on a regular basis.

You may remember the DOL’s position in the preamble to the original PTE 2020-02 that “re-interpreted” the 5-part test in the fiduciary definition to say that, where a rollover was recommended, the rollover recommendation could be connected to ongoing advice to the rollover IRA to satisfy the regular basis test. And you may remember that a Florida Federal District Court struck down that re-interpretation because the court determined that a retirement plan is one plan and the IRA is another “plan.” (The Internal Revenue Code refers to IRAs as “plans” for certain purposes.)  However, the ERISA provision defining fiduciary status says that the advice must be provided to “such plan.” Since the participant’s retirement plan is one “plan” and the rollover IRA is another “plan,” the court decided that the “re-interpretation” wasn’t appropriate because the rollover recommendation and the ongoing investment advice weren’t provided to the same plan.

But, think about a recommendation to transfer an IRA, followed by investment recommendations to the transferred IRA. It is likely that the DOL would say that the “old” IRA and the “new” IRA are the same “plan” and that, therefore, the two could be connected. In that sense, it was Mrs. Smith’s IRA at the old firm and still Mrs. Smith’s IRA at the new firm, even though additional paperwork had been signed in connection with the transfer.

As a result, there is a significant possibility, perhaps a probability, that an IRA transfer recommendation followed by investment recommendations or investment management services for the transferred IRA would be considered by the DOL to be fiduciary advice to the IRA owner for the IRA.

In that case, the conditions of PTE 2020-02 (the old 2020 version) would need to be satisfied to avoid a non-exempt  prohibited transaction(that is, the compensation earned from the transferred IRA).

Where the recommendation to transfer an IRA is a fiduciary act, and PTE 2020-02 is needed, the PTE requires that the recommendation be in the best interest of the IRA owner. Generally speaking, any fiduciary or best interest standard requires that the advisor consider: (i) the retirement investor’s current situation (e.g., current investments and services, and the costs); (ii) the investments and services that the advisor would recommend, and their costs;  and (iii) the retirement investor’s profile, including his or her needs and circumstances. The advisor would then do a comparative analysis of the current situation and the arrangement to be recommended in light of the investor profile, and recommend the alternative that is in the best interest of the investor.

Concluding Thoughts

To quote from the Jaws movie, “Just when you thought it was safe to go back in the water”, you find out that not all of the waters are safe.

The DOL’s fiduciary definition—the old version with the 5-part test—still lurks in the water. One of its dangers is that scenarios that involving ongoing advice to qualified accounts—plans, participants, and IRAs—continues to be covered by that fiduciary definition. That includes some cases where the application isn’t obvious, for example, to recommendations to transfer IRAs.

While there isn’t an explicit statement from the DOL that IRA transfer recommendations are fiduciary advice under the 5-part test, the safe course of action is to treat them as conflicted fiduciary recommendations and rely on PTE 2020-02 for protection.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.