Take a quick dive into the exciting world of ERISA with Faegre Drinker benefits and executive compensation attorneys Fred Reish and Brad Campbell. In this quick-hit series of updates, Fred and Brad offer a high-level view of current trends and recent ERISA developments.
See the newest episode, ERISA Litigation Odds and Ends: ESG, Crypto and Forfeitures, on the Spotlight on Benefits blog.
Take a quick dive into the exciting world of ERISA with Faegre Drinker benefits and executive compensation attorneys Fred Reish and Brad Campbell. In this quick-hit series of updates, Fred and Brad offer a high-level view of current trends and recent ERISA developments.
See the newest episode, The Fiduciary Rule: Effective Date and Lawsuits, on the Spotlight on Benefits blog.
Take a quick dive into the exciting world of ERISA with Faegre Drinker benefits and executive compensation attorneys Fred Reish and Brad Campbell. In this quick-hit series of updates, Fred and Brad offer a high-level view of current trends and recent ERISA developments.
See the newest episode, Plan Sponsors and SECURE 2.0: IRS “Grab Bag” Guidance, on the Spotlight on Benefits blog.
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.
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 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.
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.
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.
ERISA’s fiduciary responsibility rules require that costs, for both investments and services, be no more than a reasonable amount. In other words, a prudent process will consider the costs of investments and services relative to the value of those investments or services to the retirement investor and relative to reasonably available alternatives. ERISA’s prohibited transaction rules, and the exemptions to the prohibitions, impose a similar limit on compensation when a fiduciary recommendation is conflicted, that is, the compensation cannot be more than a reasonable amount when compared to the value of services being offered. These rules apply to all ERISA-governed retirement plans and participant accounts in those plans (including rollover recommendations).
Continue reading The New Fiduciary Rule (16): Permissible Compensation under PTE 2020-02
The SEC Division of Examinations recently released its 2024 Examination Priorities (2024-exam-priorities.pdf (sec.gov)). While the Priorities cover a range issues, this article focuses on the Priorities that could impact advice and recommendations by investment advisers and dual registrants (both referred to as advisors in this article) to retirement investors. “Retirement Investors” is DOL terminology for investors in retirement plans and IRAs. My interchangeable use of SEC and DOL language is justified by their shared interest in protecting people who are saving and investing for retirement and who are investing and spending in retirement.
Continue reading The SEC’s 2024 Examination Priorities: Impact on IRAs and Retirement Plans
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.
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
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.
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.
The DOL’s expanded definition of fiduciary advice is described 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), it results in prohibited transactions under the Internal Revenue Code and ERISA. But the PTE provides relief for conflicted non-discretionary recommendations.
While most of the focus of the literature (and of these blog articles) about rollover recommendations has been on the DOL’s fiduciary interpretation and PTE 2020-02, the SEC has, for the most part, harmonized its best interest/fiduciary requirements for rollover recommendations with those of the DOL.
This article discusses the two-part harmony between the agencies, and the areas of disharmony.
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 prohibited transaction under both ERISA and the Internal Revenue Code (i.e., the compensation earned from the rollover IRA). But, since the recommendation is nondiscretionary, PTE 2020-02 provides relief, but only if its conditions are met.
The DOL’s expanded interpretation of fiduciary advice is described in the preamble to Prohibited Transaction Exemption (PTE) 2020-02. The expanded interpretation applies to all rollover recommendations, including recommendations to rollover into annuities.
A fiduciary rollover recommendation to rollover from an ERISA-governed retirement plan results in a conflict of interest, which is the compensation from the individual retirement account or annuity.
That conflict is a prohibited transaction under the Internal Revenue Code and ERISA. PTE 2020-02 provides relief from the prohibitions if its conditions are satisfied.
One of the conditions for an insurance company to use PTE 2020-02 is that the insurance company and the investment professionals (including insurance agents) both be fiduciaries for the recommendations. However, most insurance companies have determined that they do not have the close relationships with agents, and particularly independent agents, to satisfy the fiduciary requirements in the PTE. As a result, most insurance companies have decided that they will not use PTE 2020-02 for relief for themselves and their agents from the prohibitions of the Code and ERISA.
But, when agents make rollover recommendations covered by the DOL’s expanded fiduciary interpretation, they will engage in prohibited transactions and need relief from the resulting prohibited transactions. The alternative to 2020-02 is PTE 84-24.
However, PTE 84-24 has conditions that agents must satisfy, and there are emerging stories that many agents do not know that they can be fiduciaries and do not know about the relief provided by 84-24.
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 (including transfer recommendations)–all of whom are referred to as “retirement investors.” With regard to IRAs, the term includes both individual retirement accounts and individual retirement annuities. In addition, in the preamble to the PTE, the DOL announced an expanded interpretation 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.
While it appears that most broker-dealers, investment advisers, and banks and trust companies will be relying on, and complying with, the conditions in PTE 2020-02, the same cannot be said of most insurance companies. As a result, when insurance agents recommend rollovers to annuities, they need to consider whether they are fiduciaries under the DOL’s expanded interpretation and, if so, how to comply with PTE 84-24 in order to avoid a prohibited transaction for their compensation, i.e., the commission and any trailing payments.
