Category Archives: best interest

Most Read Insights – Winter 2023


2020-02, best interest, broker-dealers, DOL, fiduciary, IRA, rollovers

Each calendar quarter, benefits and executive compensation partner Fred Reish posts approximately 12 articles on his blog, fredreish.com. This quarterly digest provides links to the most popular posts during the past three months so that you can catch up on what you missed or re-read them.

The New Fiduciary Rule (1): An Overview

In November, the U.S. Department of Labor released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment advice to plans, participants (including rollovers) and IRAs.

The New Fiduciary Rule (2): The Impact

The U.S. Department of Labor’s proposed fiduciary package will have different impacts on different types of service providers to retirement plans, participants, IRA owners, investment advisers, broker-dealers, banks and trust companies, and insurance agents. The greatest impact of the changes, if finalized as is, will be on insurance agents, particularly independent producers.

The DOL’s Regulatory Agenda and a New Fiduciary Rule

On September 8, the DOL sent a new fiduciary rule and list of prohibited transactions to the Office of Management & Budget in the White House. The DOL proposed amendments to prohibited transaction exemptions, including PTE 84-24, the exemption used for fiduciary rollover recommendations into individual annuity contracts.

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The New Fiduciary Rule (12): Advisors and Agents with Restricted Investment Menus (Part 1)


2020-02, best interest, DOL, fiduciary, prohibited transaction
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The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs.

Key Takeaways

  • The Department of Labor’s proposed fiduciary “package” expands the scope of fiduciary status (to include, e.g., one-time recommendations) and the types of transactions that are covered by fiduciary advice.
  • That is particularly important since, where the fiduciary recommendation involves a conflict of interest (e.g., a new fee or a commission), the firms and their representatives and agents will need to satisfy the conditions of either PTE 84-24 or PTE 2020-02.
  • One question that arises under the best interest standard in the PTEs is whether an adviser or agent can make recommendations from limited, or restricted, menus of available products.

This article focuses on PTE 2020-02 and the relief it provides to broker-dealers, investment advisers, banks and trust companies, and insurance companies that sell through employees and statutory employees.

Continue reading The New Fiduciary Rule (12): Advisors and Agents with Restricted Investment Menus (Part 1) →

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The New Fiduciary Rule (7): Non-Discretionary Investment Advice


2020-02, best interest, DOL, fiduciary
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The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment advice to plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • The Department of Labor’s proposed regulation defining fiduciary investment and insurance advice to private sector retirement plans, participants in those plans, and IRA owners (collectively, “retirement investors”) includes three distinct definitions.
  • Those definitions are discretionary investment management, non-discretionary investment advice, and acknowledgement of fiduciary status.
  • The most controversial of these proposals is the new definition of non-discretionary investment advice. If an investment adviser, broker-dealer, or insurance agent (“investment professional”) satisfies that definition, the investment professional will be a fiduciary under ERISA and the Internal Revenue Code.

This post discusses the “non-discretionary” definition of fiduciary investment advice in the DOL’s proposed fiduciary regulation. The other two definitions of fiduciary status are covered by my posts The New Fiduciary Rule (5) and The New Fiduciary Rule (6).

Continue reading The New Fiduciary Rule (7): Non-Discretionary Investment Advice →

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Most Read Insights – Summer 2023


best interest, DOL, fiduciary, IRA, prohibited transaction, rollovers, SECURE 2.0

Each calendar quarter, benefits and executive compensation partner Fred Reish posts approximately 12 articles on his blog, fredreish.com. This quarterly digest provides links to the most popular posts during the past three months so that you can catch up on what you missed or re-read them.

Rollovers, Regulation, Litigation: Where Are We and What’s Next?

The recent decisions on the U.S. Department of Labor’s (DOL) interpretation of fiduciary status are significant but limited in scope. Fiduciary status for plan-to-IRA rollover recommendations, standing alone, has been vacated. But other important transactions, such as IRA transfers, have not.

The Secure Act 2.0: The Most Impactful Provisions #14 — Automatic Portability for IRA Force-Outs

Current law permits plans to force out distributions of accounts with less than $5,000 in benefits if a departed employee does not affirmatively elect to receive their benefits. (That amount is increasing to $7,000 in 2024.) The “force-out” amounts must be rolled over into an IRA if the account balance is at least $1,000.

The DOL’s Regulatory Agenda and a New Fiduciary Rule

On September 8, the DOL sent a new fiduciary rule and list of prohibited transactions to the Office of Management & Budget in the White House. The DOL proposed amendments to prohibited transaction exemptions, including PTE 84-24, the exemption used for fiduciary rollover recommendations into individual annuity contracts.

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The DOL’s Regulatory Agenda and a New Fiduciary Rule


2020-02, best interest, DOL, fiduciary, IRA, rollovers
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UPDATE: On August 8, I posted this blog article in contemplation of the DOL sending a new fiduciary proposal package to the Office of Management & Budget (OMB) in the White House. One month later, to the day, the receipt of the DOL’s proposed fiduciary rule and prohibited transactions was posted on the OMB’s website. In reviewing my blog article, I think it was spot on in predicting key elements of the fiduciary rule and the exemptions. However, that is still based on my crystal ball, since the changes new proposals won’t be known until they are vetted by the OMB and published in the Federal Register—probably 45 to 60 days from now. As this article suggests, the fiduciary proposal will likely say that rollover recommendations are fiduciary advice and that rollover recommendations to annuities will be subject to more stringent standards.

Key Takeaways

  • The anticipated DOL proposed fiduciary regulation could be sent to the Office of Management & Budget (OMB) in a matter of weeks.
  • The proposal will likely say that a rollover recommendation to a participant in an ERISA governed retirement plan is a fiduciary act.
  • The DOL will also likely propose amendments to prohibited transaction exemptions (PTEs), including to PTE 84-24, the exemption used for fiduciary rollover recommendations into individual annuity contracts.

The DOL has not appealed the decision in the Florida Federal District Court that vacated its fiduciary “re-interpretation.” That re-interpretation, in effect, said that ongoing investment advice to a rollover IRA could be connected to the rollover recommendation to a participant such that the “regular basis” prong of the 5-part fiduciary test would be satisfied. For context, the DOL had previously said that, if a person was not already a fiduciary to a plan, a recommendation to a participant to rollover his or her benefits was a standalone recommendation and therefore did not satisfy the regular basis prong of the 5-part test.

The re-interpretation tried to connect the recommendation to the plan (that is, for the participant to rollover to an IRA) to subsequent investment advice to the rollover IRA and, in that way, to conclude that the rollover recommendation was part of a regular basis advice arrangement. However, the Court held that the “regular basis” test is applied separately to the plan and the IRA and advice to the two could not be connected.

Continue reading The DOL’s Regulatory Agenda and a New Fiduciary Rule →

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Most Popular Insights for the Fourth Quarter


best interest, DOL, FINRA, IRA, prohibited transaction, rollovers

Each calendar quarter, I post approximately 12 articles on my blog, fredreish.com. This quarterly digest provides links to the most popular posts during the past three months so that you can catch up on what you missed or re-read them.

  • A Rollover Recommendation is a Securities Recommendation

    The Department of Labor (DOL) considers a rollover recommendation to be a recommendation to liquidate the investments in a participant’s 401(k) account or to transfer (and change) securities. This article discusses how the Securities and Exchange Commission, and the Financial Industry Regulatory Authority are in alignment with the DOL and why those agencies expect broker-dealers and investment advisers to have information about the investments held in a participant’s account.

  • Discretionary Management of IRAs: Conflicts and Prohibited Transactions

    Where an investment adviser charges different fees for managing fixed income in a portfolio than for managing equities and has discretion to determine the allocation between the two in an IRA, the investment adviser has control over its fees, which appears to violate a prohibited transaction provision in the Internal Revenue Code. The inadvertent violation can be corrected, going forward, by using a blended rate where both allocations are charged the same fee. In other words, there would just be an account fee and not a fee that varied by allocations that are within the control of the investment adviser. This article focuses on allocations among asset classes where the adviser charges different fees.

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A Rollover Recommendation Is a Securities Recommendation


best interest, DOL, FINRA, rollovers, SEC

Key Takeaways

    • The Department of Labor considers a rollover recommendation to be a recommendation to liquidate the investments in a participant’s 401(k) account or to transfer (and change) securities.
    • In addition, as explained in earlier articles, the DOL considers a plan-to-IRA rollover to be a change of account type, e.g., from a 401(k) account to an IRA account.
    • The SEC and FINRA are in alignment with the DOL’s position that a recommendation to roll over is, in effect, a securities recommendation, e.g., to liquidate the investments in the 401(k) account and rollover cash (since 401(k) plans almost never transfer the plan’s investments to an IRA and in some cases, it would not be legally permissible, e.g., collective investment trusts, CITs).
    • This may explain why the DOL, SEC and FINRA all expect broker-dealers and investment advisers to have information about the investments held in a participant’s account, that is, how can a “sell” recommendation be made without knowing the investments that the recommendation covers.

In the preamble to PTE 2020-02, the DOL explained its view that:

 A recommendation to roll assets out of a Title I Plan is necessarily a recommendation to liquidate or transfer the plan’s property interest in the affected assets and the participant’s associated property interest in plan investments.35 Typically the assets, fees, asset management structure, investment options, and investment service options all change with the decision to roll money out of a Title I Plan. Moreover, a distribution recommendation commonly involves either advice to change specific investments in the Title I Plan or to change fees and services directly affecting the return on those investments.

Continue reading A Rollover Recommendation Is a Securities Recommendation →

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Investment Advisers: The Independent Duties of Care and Loyalty


best interest, DOL, fiduciary, prohibited transaction, SEC
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Key Takeaways

  • Recent SEC guidance has clarified that the investment adviser duties of care and loyalty are separate, independent duties.
  • A reasonable interpretation of the SEC and Staff guidance is that the satisfaction of one will not satisfy the other–both must be individually satisfied.
  • As a result, the SEC appears to be saying that, even if a conflict is disclosed, that does not, in and of itself, satisfy the duty of care. For example, if an adviser discloses that the adviser will receive compensation related to an investment decision or recommendation, e.g., revenue sharing, but the revenue sharing share class of a mutual fund is more expensive for the investor, the duty of care may be violated even though the duty of loyalty was satisfied.

There appear to be conflicting views of whether an investment adviser’s duty of care can be satisfied by disclosures that satisfy the duty of loyalty. That is, if an adviser discloses the receipt of additional compensation from investments or service providers, can the adviser then recommend or select that investment even though it may be more expensive for the client?  In recent years, the SEC has issued guidance that seems to answer that question…and the answer appears to be “no.” Based on its 2019 Commission Interpretation Regarding Standard of Conduct for Investment Advisers, and the two 2022 SEC Staff Bulletins, the position of the SEC (and of the Staff) is that the duties of care and loyalty (together referred to as the duty to act in the best interest of investors) are separate and distinct, and that they each must be independently satisfied.

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Best Interest Standard of Care for Advisors #100: Liabilities and Opportunities


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, rollovers
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Key Takeaways

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

When conflicted fiduciary advice is given to retirement investors, that is, retirement plans, participants (including rollovers), and IRA owners (including transfers of IRAs), it results in prohibited transactions under the Internal Revenue Code and ERISA. The prohibited transaction is the compensation earned as a result of the fiduciary recommendation, e.g., the fees or commissions from a rollover IRA.

The PTE provides relief for the prohibitions resulting from conflicted non-discretionary recommendations. However, the relief is conditional, that is, it is only available if all of the PTE’s conditions are satisfied.

The compliance deadline was February 1, 2021 for most of the PTE’s conditions and July 1 for the one remaining condition–the requirement to provide retirement investors in writing with the “specific reasons” why a rollover recommendation is in their best interest.

As a result, the documentation and processes for compliance with PTE 2020-02’s conditions should now be completed. So, this is a good time to consider the liability issues and the opportunities created by the PTE.

Background

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.

Since a significantly increased number of recommendations to retirement investors will be fiduciary recommendations under the expanded fiduciary interpretation, and since many, if not most, of those recommendations will involve conflicts of interest, financial institutions and investment professionals will need to satisfy the “conditions” (or requirements) in the PTE. The 4 categories of those conditions are: (1) the Impartial Conduct Standards (including the best interest standard of care); (2) disclosures (including the “specific reasons”), (3) policies and procedures (include mitigation of conflicts), and (4) the annual retrospective review and report.

Continue reading Best Interest Standard of Care for Advisors #100: Liabilities and Opportunities →

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Best Interest Standard of Care for Advisors #99: The PTE 2020-02 Requirement for An Annual Retrospective Review


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, rollovers
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Key Takeaways

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

When conflicted fiduciary advice is given to retirement investors (that is, retirement plans, participants (including rollovers), and IRA owners (including transfers of IRAs), it results in prohibited transactions under the Internal Revenue Code and ERISA. The PTE provides relief for conflicted non-discretionary recommendations. However, the relief is only available if all of the PTE’s conditions are satisfied.

While much attention has been given to the conduct, disclosure and policies “conditions” for obtaining the relief provided by PTE 2020-02, there hasn’t been much discussion of the PTE’s “condition” that requires an annual retrospective review and report. This article discusses that requirement.

Background

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.

For example, a rollover recommendation will ordinarily be nondiscretionary fiduciary advice and result in a financial conflict of interest (i.e., the compensation earned from the rollover IRA) that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is nondiscretionary, PTE 2020-02 provides relief, but only if all of its conditions are met.

Continue reading Best Interest Standard of Care for Advisors #99: The PTE 2020-02 Requirement for An Annual Retrospective Review →

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