Best Interest Standard of Care for Advisors #86: Information Needed for Rollover Recommendations

Key Takeaways

The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice, particularly for rollover recommendations.

The DOL’s expanded definition of fiduciary advice was described in the preamble to PTE 2020-02.

The PTE then provides relief for conflicted non-discretionary recommendations (for example, rollover recommendations), if its conditions are satisfied.

A number of my earlier articles have discussed the requirements that PTE 2020-02 imposes on rollover recommendations.

This article discusses the need for information about the plan and the participant’s interests in the plan in order to develop a compliant rollover recommendation.


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 ERISA retirement plans, participants (including rollover recommendations), and IRA owners (all of whom are referred to as “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 are fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.

In the preamble to the PTE, the DOL described its expanded definition of fiduciary advice. The fiduciary regulations in ERISA and the Internal Revenue Code have two definitions of fiduciary advice. The first is the obvious—where the investment professional and financial institution have discretion over the investments in retirement accounts. In effect, that is a one-part test—“discretion.” In addition, there is a 5-part test for non-discretionary fiduciary advice. The DOL did not amend the regulation to modify any of the “parts,” but instead reinterpreted some of the parts, and particularly the “regular basis” part, to significantly increase the number of investment professionals and financial institutions who are fiduciaries.

This article focuses on the information that is needed to make a compliant rollover recommendation and particularly about information concerning the participant’s interest in the plan.

After PTE 2020-02 became effective on February 16, 2021, the DOL issued FAQs  explaining its position on several compliance issues. FAQ 15 starts with:

Q15. What factors should financial institutions and investment professionals consider and document in their disclosure of the reasons that a rollover recommendation is in a retirement investor’s best interest?

Financial institutions and investment professionals must consider and document their prudent analysis of why a rollover recommendation is in a retirement investor’s best interest. For recommendations to roll over assets from an employee benefit plan to an IRA, the relevant factors include but are not limited to:

  • the alternatives to a rollover, including leaving the money in the investor’s employer’s plan, if permitted;
  • the fees and expenses associated with both the plan and the IRA;
  • whether the employer pays for some or all of the plan’s administrative expenses; and
  • the different levels of services and investments available under the plan and the IRA.

In a nutshell, the DOL position on plan information is that the financial institution and investment professional must obtain information about the plan investments, services, and expenses. The FAQ also says that: “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.” That raises the obvious question of, how can a financial institution and investment professional get that information?

The DOL FAQ goes on to explain that the information is “readily available” in the required participant disclosures, for example, the 404a-5 investment chart. But, what if the participant can’t find that information or won’t provide it. (In theory at least, participants should be able to obtain the information through their benefits offices or their recordkeepers.)  In that case, and with the required admonitions, “alternative” data can be used, such as benchmarking information or a plan’s Form 5500. That seems straightforward…but it may not be.

I am concerned that some, perhaps many, financial institutions are reading that as if the DOL was saying that, for alternative data, only expense information is needed, and that it is enough to compare the expenses of the plan with those of the IRA. But, if you read the language closely, it doesn’t say that, if you use alternative data, you don’t need to know about the plan’s investments and services. In turn, that raises the issue of how to obtain information about the plan’s services and investments. In my view, a fair reading of the DOL’s FAQ would be that a benchmarking service could provide averages of the types of investments and services provided by plans of that “type and size,” as well as expense information for those plans.

With that information, an investment professional could perform a best interest comparison of the participant’s alternatives. That process would compare the services, investments and expenses in the plan and the IRA in light of the participant’s needs and circumstances. While the DOL guidance could be clearer, it does seem difficult to do a comparative analysis of costs without considering the investments and services in the plan and the IRA. After all, the relevance of cost is whether the higher cost alternative provides enough additional value to offset the cost differential.

Without greater clarity from the DOL, the “safe” position is to assume that information is needed about investments and services, as well as about the expenses.

Concluding Thoughts

Financial institutions need to consider these issues from a risk perspective. Do they want to take the “safe” position and obtain alternative data about a plan’s services, investments, and expenses? Or are they willing to assume the risk of only considering plan costs?  It would help if the DOL augmented its guidance so that we knew what was required.

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.