Best Interest Standard of Care for Advisors #67: Compliance with PTE 2020-02: Factors to Evaluate for a Rollover Recommendation (Part 3)

The DOL “Fiduciary Rule,” FAQ 15: Factors to Evaluate for a Rollover Recommendation (Part 3)

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.

Key Takeaways

  • The DOL FAQs generally explain PTE 2020-02 and the expanded definition of fiduciary advice.
  • FAQ 15 explains the DOL’s opinion on the factors to be considered in the process of determining whether a rollover recommendation is in the best interest of a plan participant. In order to obtain relief from the prohibited transaction that results from a rollover recommendation where the financial institution and the investment professional are fiduciaries for the recommendation, the Impartial Conduct Standards must be satisfied during the period from February 16, 2021 until December 20, 2021 under the DOL’s non-enforcement policy (with concurrence by the IRS), and then on December 21, all of the conditions of PTE 2020-02 must be satisfied.
  • However, the requirement that a rollover recommendation satisfy the best interest standard of care is not delayed until December 21, since the Impartial Conduct Standards require that a financial institution and an investment professional satisfy the best interest standard of care. FAQ 15 explains the DOL’s view on what is required to do that.


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, in the preamble to the PTE the DOL announced 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 15, a DOL question and answer about the factors that must be considered to satisfy the best interest standard of care for rollover recommendations. The first article in this subseries, Best Interest #65, quoted the full Q & A. This week’s article focuses on these parts of the answer:

When considering the alternatives to a rollover, the financial institution and investment professional generally should not focus solely on the retirement investor’s existing investment allocation, without any consideration of other investment options in the plan.

Comment: Information about how the participant is actually investing—that is, which investments the participant is using—can be found on the participant’s quarterly statement. But to obtain “primary” information about the available investments and their share classes, financial institutions and investment professionals will need to either obtain (i) actual data from the plan or its recordkeeper (or a service that can provide that information) or (ii) a copy of the 404a-5 investment comparative chart. (In case you have actually seen a 404a-5 disclosure, here is the model statement that the DOL attached to its 404a-5 regulation.)

As you probably know, if the participant can’t or won’t provide the 404a-5 information (even though it is available on the plan’s website, but may not be labeled “404a-5”), an investment professional can use “alternative” data, but only after making a “diligent and prudent” effort to obtain the information and admonishing the participant about the consequences of using alternative data.

I can understand how alternative data could work for average investment expenses, but it’s not clear how this provision would apply to the DOL’s requirement that the investment professional and financial institution consider the participant’s existing investment allocation and the investment options in the plan. One reasonable interpretation could be that the investment professional should consider the range and types of investments typically found in a plan of that size and type, as well as the expenses—but that’s just an educated guess.

To further complicate matters, it’s not clear how the investment professional should consider and weigh the investments in the plan that are not being used by the participant. In light of the lack of detailed guidance, we are left to make assumptions about what the DOL is looking for. However, based on what the DOL said in its guidance, it could be problematic if the full range of available investments is not considered.

The DOL’s FAQ 15 also says:

As relevant, the analysis should include consideration of factors such as the long-term impact of any increased costs; why the rollover is appropriate notwithstanding any additional costs; and the impact of economically significant investment features such as surrender schedules and index annuity cap and participation rates.

Comment:  Focusing on the references to cost, the FAQs is a clear message that the DOL considers the increase in cost (that typically occurs with a plan-to-IRA rollover) needs to be justified. As a result, financial institutions should consider structuring their rollover processes to justify “why the rollover is appropriate notwithstanding any additional costs”. To do that under the best interest standard of care, the investment professional and financial institution need to examine “the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor”. Some financial institutions may be focusing on the preferences of the retirement investor, as opposed to the needs, objectives and circumstances of the retirement investor. While preferences could be considered, preferences alone may not satisfy the best interest standard. Since this is a principles-based rule, a safer approach could be to determine which alternative is in the best interest of the retirement investor based on a range of factors, including those specifically stated in the best interest standard and in the DOL’s list of factors to be considered (see Best Interest #65).

Concluding thoughts

PTE 2020-02 has created a new compliance structure for recommendations for rollovers. The PTE has a number of compliance “conditions” that must be satisfied to obtain its protection. That starting point is to comply with the best interest standard care, and the fundamental question for best interest rollovers appears to be…how can the increased cost of the IRA be justified? What services and products will offset the cost difference?

While it would be easy to rely on generalized answers, such as the rollover IRA will have access to more investments or services, the issue is whether those additional investments and services will provide value to a particular retirement investor that is sufficient to offset the cost difference. Keep in mind that when the regulators examine for compliance with the PTE, they will be able to see if those additional investments and services were actually recommended to and used by the retirement investor.

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.