Best Interest Standard of Care for Advisors #68: Compliance with PTE 2020-02: Factors to Evaluate for a Rollover Recommendation (Part 4)

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. One of the requirements is that the investment professional and the financial institution obtain information about the participant’s plan and account. The preferred approach is to use “primary” data (that is, actual and current plan data), but in some circumstances “alternative”, or secondary, data can be used.
  • The requirement that a rollover recommendation from a plan to an IRA satisfy the best interest standard of care already applies, since the DOL non-enforcement policy delays the exemption conditions but not the fiduciary definition.


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 the use of primary plan data and alternative plan data.

When most people think of the plan data that a fiduciary needs to recommend a rollover, their thoughts automatically go to the 404a-5 disclosure form. However, that is not what the guidance says. Here’s a quote from FAQ 15:

To satisfy the documentation requirement for rollovers from an employee benefit plan to an IRA, investment professionals and financial institutions should make diligent and prudent efforts to obtain information about the existing employee benefit plan and the participant’s interests in it.

As you can see from that quote, the requirement is that information about the plan and the participant’s account be reviewed. And earlier in FAQ 15, the DOL explains that the required plan information is: the fees and expenses associated with both the plan, whether the employer pays for some or all of the plan’s administrative expenses, the different levels of services and investments available under the plan.

That’s pretty clear…information is needed about the current investments, services and expenses in the plan (which I refer to as “primary” data). Additional details about the requirement are explained in the FAQ, where the DOL says: 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.

So, the DOL’s position is that, in order to have a compliant and prudent process for recommending a rollover from a plan to an IRA, one of the requirements is that the investment professional and financial institution obtain information about:

  • The investments in the plan;
  • The participant’s asset allocation;
  • The fees and expenses in the plan; and
  • The services in the plan.

But, how can the investment professional obtain that “primary” information?

As a practical matter, there are a handful of ways:

  • From a 404a-5 disclosure statement;
  • From the benefits office of the participant’s employer (with the participant’s help);
  • From the plan website (with the participant’s help); or
  • From a commercial service that likely obtains the information from the plan’s recordkeeper.

In the quote above, the DOL said that financial institutions and investment professionals must make a diligent and prudent effort to obtain primary information. Is it “diligent and prudent” to just ask for it?  Must the participant be told that they can get copies from their plan website or the benefits office of their employer?  Those questions have not been answered by the DOL…but they may be at some point.

In FAQ 15, the DOL uses an example of obtaining the information from the 404a-5 disclosure: In general, such information should be readily available as a result of Department regulations mandating disclosure of plan-related information to the plan’s participants (see 29 CFR 2550.404a-5).

However, that is just one of the ways to do it.

But, what if none of those options works?

Then, with proper admonitions to the participant, “alternative” data can be used. FAQ 15 says: If the retirement investor won’t provide the information, even after a full explanation of its significance, and the information is not otherwise readily available, the financial institution and investment professional should make a reasonable estimation of expenses, asset values, risk, and returns based on publicly available information. The financial institution and investment professional should document and explain the assumptions used and their limitations.

As the bolded language explains, in order to use alternative data, the financial institution and the investment professional:

  • Must provide the participant with a “full explanation of the significance” of not providing the current plan information, and
  • Should document and explain the assumptions used and their limitations.

Even then, there are unanswered questions. For example, this process allows alternative data to be used for “a reasonable estimation of expenses, asset values, risk, and returns.” (That data could come from a benchmarking service or from a Form 5500 previously filed by the plan.)  But, what does that really mean?  Does the use of alternative data mean that there is no longer a need to have information about how the participant is invested in his or her account?  About the range of investments in the plan?  About the services in the plan? Unfortunately, the DOL hasn’t answered those questions, leaving financial institutions at risk—at least, risk of the unknown—if they don’t have that information. If nothing else, this emphasizes the importance of obtaining primary data—whether from a participant’s quarterly statement, the 404a-5 disclosure statement, a commercial service, or otherwise.

Concluding thoughts

The bottom line is that “primary” data clearly satisfies the DOL’s requirement for plan information for a rollover recommendation. However, it isn’t clear whether alternative satisfies all of the requirements to get information about the plan and the participant’s account, or only the requirement, e.g., to get expense information. It also isn’t clear how much effort is required to satisfy the “diligent and prudent effort” requirement.

As a result, the effort to obtain the primary data should be demonstrably diligent and prudent (and perhaps documented) and the admonitions to the participant should be complete and meaningful.

A reasonable reading of the guidance is that the DOL understands that, in some cases, alternative data can be used. So it is intended to be a pathway. But, to go down that road, the DOL’s additional requirements should be satisfied.

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.