Interest Standard of Care for Advisors #66: Compliance with PTE 2020-02: Factors to Evaluate for a Rollover Recommendation (Part 2)

The DOL “Fiduciary Rule,” FAQ 15: Factors to Evaluate for a Rollover Recommendation (Part 2)

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.
  • In order to obtain relief from the prohibited transaction that results from a rollover recommendation where the financial institution and the investment professional are fiduciaries for the recommendation, the Impartial Conduct Standards must be satisfied during the period from February 16, 2021 until December 20, 2021 under the DOL’s non-enforcement policy (with concurrence by the IRS), and then on December 21, all of the conditions of PTE 2020-02 must be satisfied.
  • However, the requirement that a rollover recommendation satisfy the best interest standard of care is not delayed until December 21, since the Impartial Conduct Standards require that a financial institution and an investment professional satisfy the best interest standard of care. FAQ 15 explains the DOL’s view on what is required to do that.


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. Last week’s article, Best Interest #65, quoted the full Q & A. This week’s article focuses on this part of the answer:

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. 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).

One of the requirements of a best interest process for deciding whether to recommend a rollover is to obtain the “relevant” information about the plan. That would include information about the investments, services and expenses in the plan. One source of that information is the 404a-5 investment comparative chart that must be provided to participants every year. Unfortunately, it appears that many participants don’t know that they are receiving that information, perhaps because it isn’t labelled 404a-5 or perhaps because it is posted on their plan’s website and only announced by a generic email link. Either way, I hear that many participants don’t know what a 404a-5 disclosure is or whether they even have access to that information.

That raises the question of whether there is a difference between an “effort” and a “diligent and prudent effort” to obtain that “primary” information about the plan. (I use the word “primary” to refer to information that is current and is about the actual investments, services and costs for the plan. Some data services may also provide primary data, while others provide alternative data.) Unfortunately, the DOL doesn’t explain what “diligent and prudent” means in terms of the effort that must be made to obtain primary data. As a word of caution, financial institutions should consider, at the least, providing a clear admonition that, if the participant fails to provide that data, the recommendation could be based on incorrect information and therefore could be flawed.

The apparent inability of participants to provide that information is compounded by the fact that participants can easily access the information on their plan’s website if they were aware that they could. That raises the issue of whether an investment professional should explain what he or she is looking for—as opposed to just labelling it as a 404a-5 statement.

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 bolded language “even after a full explanation of its significance” is not further explained by the DOL. However, one logical interpretation is that the financial institution and the investment professional should explain that, if alternative data is used, it could affect the recommendation and possibly result in a recommendation that is not best for the participant. But, that’s an interpretation and there may be other reasonable interpretations.

The financial institution and investment professional should document and explain the assumptions used and their limitations.

While not entirely clear, this appears to refer to the “reasonable estimation” in the guidance. In any event, financial institutions might decide to be conservative in interpreting the language, because of the lack of clarity, and therefore “document and explain” how they obtained the alternative data and any assumptions associated with it, as well as limitations in the application of that data.

In such cases, the financial institution and investment professional could rely on alternative data sources, such as the most recent Form 5500 or reliable benchmarks on typical fees and expenses for the type and size of plan at issue.

Once the process of making diligent and prudent efforts to obtain the data, and the admonitions, has been completed, the financial institution and investment professional can use “alternative data”. (By comparison, if primary data was used, whether from the 404a-5 chart or from a provider of primary data, the admonitions and explanations would not have been needed.) The FAQ gives two examples of alternative data: The “most recent” Form 5500 and a benchmark provider. Either would satisfy this requirement. However, small plans (with less than 100 participants) do not file Forms 5500. Instead, they file Forms 5500-SF, which do not provide investment information and therefore which would not provide helpful alternative data.

Concluding thoughts

There are five steps to a compliant rollover process (which will be detailed in a subsequent article). One of those steps is to gather information about the investments, services and costs in the plan. That information is needed in order to engage in a best interest analysis of the costs in the plan and in a contemplated IRA in order to determine which alternative is in the best interest of the participant. The outcome of a best interest process, which is a condition of PTE 2020-02, is dependent on the quality of the data obtained about the plan, the IRA and the participant.

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.