Category Archives: rollovers

The SEC’s 2024 Examination Priorities: Impact on IRAs and Retirement Plans


broker-dealers, DOL, investment adviser, IRA, rollovers, SEC
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Key Takeaways

  • The SEC Division of Examinations is focused on advice to older investors and retirement investors. Advisors and their firms should review their practices for those investors.
  • Among the concerns of the Division of Examinations is whether conflicts are adequately disclosed so that investors can provide informed consent. Off-the-shelf disclosures may not have sufficient information to pass that test.
  • The starting point for making an investment recommendation or providing investment advice is to develop a profile of the investor that considers the information relevant to the investor’s needs and circumstances. The information needed for the profile for retired investors may be different than for accumulation investors. Questionnaires and other information gathering materials should be reviewed to ensure their adequacy for purposes of investors who will regularly withdraw cash for lifelong retirement income from their accounts.

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.

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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.

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


fiduciary, IRA, prohibited transaction, rollovers, SECURE 2.0
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Key Takeaways

  • 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 his or her 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.
  • SECURE 2.0 permits the provider of the IRAs that receive the forced-out amounts to continuously reach out to recordkeepers to determine if the IRA owner has begun participating in a plan that is recordkept by a participating recordkeeper and, if so, to transfer the IRA amounts to the IRA owner’s account in the new plan.
  • The provider of the IRAs must act as a fiduciary for that purpose and therefore must act in the best interest of the IRA owner.
  • The provider can collect a reasonable fee from the force-out IRA for those services and the fee will not be considered a prohibited transaction.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between SECURE Act 2.0 and previous retirement plan laws is that many of 2.0’s provisions are optional . . . that is, plan sponsors are not required to adopt the provisions, but can adopt them if they decide that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article is about an effort by Congress to protect the benefits of former employees with small account balances who have been forced out of plans into default rollover IRAs.

Continue reading The SECURE Act 2.0: The Most Impactful Provisions #14 — Automatic Portability for IRA Force-outs →

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


2020-02, fiduciary, prohibited transaction, rollovers
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Key Takeaways

  • The recent decisions on the DOL’s 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.
  • Also, where an advisor is a fiduciary to a plan or participant, and then recommends a rollover, the DOL will likely take the position that the rollover recommendation is a fiduciary act, necessitating the use of PTE 2020-02.
  • In addition, the SEC’s guidance on rollover recommendations by investment advisers and broker-dealers is closely aligned with the DOL’s, particularly on the best interest process, and the relevant plan information, needed to engage in a best interest process.

Let’s take a break from my SECURE 2.0 series of articles to discuss what is going on with the DOL’s fiduciary rule.

The Past

As background, in the preamble to Prohibited Transaction Exemption (PTE) 2020-02, the DOL re-interpreted the 5-part test in its regulation defining fiduciary status for nondiscretionary investment advice. The most significant part of the reinterpretation was the DOL position that recommendations to participants to take distributions from their retirement plans and to rollover to IRAs could be connected to subsequent investment advice to the rollover IRAs to satisfy the “regular basis” prong of the 5-part test.

Under that theory most rollover recommendations would be fiduciary recommendations, which in turn would require satisfaction of the conditions in PTE 2020-02 to obtain relief from the resulting prohibited transaction. (The prohibited transaction is the receipt of compensation from the rollover IRA.)  Among other things, the PTE requires a best interest process that includes comparison of the investments, expenses and services in the plan and the IRA, in light of the needs and circumstances of the participant.

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The DOL’s Fiduciary Interpretation and the Florida Court Decision


DOL, fiduciary, IRA, rollovers
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In 2020, the Department of Labor (DOL) issued its Prohibited Transaction Exemption (PTE) 2020-02 to provide an exemption to most prohibited transactions resulting from nondiscretionary fiduciary advice to retirement plans governed by either ERISA or the Internal Revenue Code, or both, as well as nondiscretionary fiduciary advice to IRAs.

The DOL’s Fiduciary Interpretation and Prohibited Transaction Exemption

In the preamble to the PTE, the DOL expanded its view of the nature of the advice that would result in fiduciary status. One of those expanded interpretations was that, in a rollover context, IRAs and plans should be viewed as having a continuous connection because they are retirement assets on a continuum. More specifically, the DOL said that, if an advisor has been providing investment advice on a regular basis to an IRA and then recommends that the IRA owner make a rollover to the IRA, the plan-to-IRA rollover recommendation would be connected to the advice to the IRA that had been provided on a regular basis and, as a result, the advisor would be a fiduciary for the rollover recommendation. Similarly, if an advisor made a plan-to-IRA rollover recommendation and then provided investment advice to the rollover IRA on a regular basis, the advisor would be a fiduciary for the rollover recommendation because the rollover recommendation and the advice to the rollover IRA would be on a continuum. (For the purposes of this article, “advisor” includes broker-dealers and investment advisers, and their representatives, and insurance agents.)

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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.

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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.

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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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Best Interest Standard of Care for Advisors #98: How PTE 2020-02 Impacts Advice to IRAs


2020-02, best interest, DOL, IRA, rollovers
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Key Takeaways

The DOL’s expanded definition of fiduciary advice to retirement plans, participants, and IRAs was described in the preamble to PTE 2020-02.

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

One of the conditions for relief is that a recommendation be in the best interest of the retirement investor (e.g., retirement plan, participant in a plan, or an IRA owner).

In addition, the PTE includes requirements, or “conditions”, that focus on conflicts of interest.

This article discusses the PTE’s coverage of advice to IRAs, including the conflicts issues.

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.

The fiduciary regulations under 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.

Continue reading Best Interest Standard of Care for Advisors #98: How PTE 2020-02 Impacts Advice to IRAs →

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