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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The SECURE Act 2.0: The Most Impactful Provisions (#5-Catch-up Contributions for Higher Compensated Must be Roth Contributions)


plan sponsors, SECURE Act
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Key Takeaways

  • The SECURE Act 2.0 requires that catch-up contributions for higher compensated participants be treated as Roth deferrals.
  • This provision is effective for tax years beginning after December 31, 2023 (that is, in 2024 for calendar year taxpayers).
  • Unfortunately, due to a drafting error in the legislation, the provision in the Code that permits catch-up contributions is repealed beginning in 2024. But technical corrections legislation may correct that.

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 the SECURE Act 2.0 and previous acts is that so many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can if they conclude 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 discusses one of the mandatory provisions—that catch-up contributions for participants who earn over $145,000 (indexed) must be treated as Roth deferrals. That is, the deferrals will be after-tax, but the withdrawals of those contributions will be tax-free and, if the Roth conditions are satisfied, the withdrawals of earnings will also be tax-free. In addition, the RMD rules do not apply to Roth accounts (and, as a result, withdrawals from Roth accounts can be deferred indefinitely until the money is needed).

Continue reading The SECURE Act 2.0: The Most Impactful Provisions (#5-Catch-up Contributions for Higher Compensated Must be Roth Contributions) →

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The SECURE Act 2.0: The Most Impactful Provisions (#4–Optional Treatment of Employer Contributions as Roth Contributions)


SECURE Act
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Key Takeaways

  • The SECURE Act 2.0 permits plan sponsors to give participants the option of receiving employer contributions on a Roth basis.
  • This provision is effective on the date of enactment, December 29, 2022.
  • However, the option may not be as attractive as it first appears, since the matching and nonelective contributions must be fully vested when made.

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 the SECURE Act 2.0 and previous acts is that so many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can if they conclude that the change will help the plan and the participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article discusses one of the optional provisions—the ability of plan sponsors to permit participants to elect to receive matching and nonelective employer contributions on a Roth basis, meaning that the contributions would be taxed through to the participant when made, but that the contributed amounts would ultimately be distributed tax free and, if the Roth conditions are satisfied, the earnings would also be tax free. This provision was effective on the date on enactment of SECURE Act 2.0—December 29, 2022.

Continue reading The SECURE Act 2.0: The Most Impactful Provisions (#4–Optional Treatment of Employer Contributions as Roth Contributions) →

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The SECURE Act 2.0: The Most Impactful Provisions (#3–Extension of RMD Start Ages)


SECURE Act
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Key Takeaways

  • The SECURE Act 1.0 delayed the starting age for RMDs from 70½ to 72.
  • SECURE Act 2.0 further delays the ages to 73 and 75.
  • As a practical matter, while most plan participants and IRA owners will need to access their retirement savings before those ages, the change creates an opportunity for higher compensated and wealthy individuals to delay the tax consequences of mandatory distributions from plans and IRAs.

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 won’t be effective for years to come. This series of blog articles discusses the provisions that are likely to be the most impactful.

The first article was about Automatic Plans, a mandatory provision. The second article was about Matching Student Loan Payments, an optional provision.

This article discusses the extension of the starting age for Required Mandatory Distributions (RMDs). The SECURE Act 1.0 delayed the starting age from 70½ to 72. SECURE Act 2.0 further delays those dates. As a result of the changes in those two statutes, the ages for starting RMDs are:  72 in 2022; 73 in  2023; and 75 in 2033.

Continue reading The SECURE Act 2.0: The Most Impactful Provisions (#3–Extension of RMD Start Ages) →

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The SECURE Act 2.0: The Most Impactful Provisions (#2–Student Loan Matches)


SECURE Act
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Key Takeaways

  • Some provisions in SECURE Act 2.0 are optional, where plan sponsors can adopt the provision in their discretion. Many of those provisions are opportunities to make plans more attractive or beneficial to employees.
  • One such optional provision is the ability to match student loan repayments, which should be attractive to employers who hire college graduates.
  • The provision is effective for plan years after December 31, 2023.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022—the “enactment date”.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some are mandatory and some are optional; and some are retroactively effective and some won’t be effective for years to come. This series of articles will discuss the provisions that are likely to be the most impactful.

Continue reading The SECURE Act 2.0: The Most Impactful Provisions (#2–Student Loan Matches) →

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The SECURE Act 2.0: The Most Impactful Provisions (#1–Automatic Plans)


401(k), 403(b), SECURE Act
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Key Takeaways

  • “New” 401(k) and 403(b) plans must be automatically enrolled, with automatic deferral increases, no later than the plan year beginning after December 31, 2024 (e.g., 2025 for calendar year plans).
  • Any plan “established” on or after December 29, 2022 is considered a new plan.
  • Defaulting participants must be invested in a QDIA.
  • There are exceptions for government plans, church plans, SIMPLE 401(k) plans, employers with 10 or fewer employees, and employers during their first 3 years of existence.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022—the “enactment date”.

SECURE Act 2.0 has over 90 provisions, some major and some minor. One of the most impactful provisions is the new requirement to automatically enroll and automatically increase deferrals to new 401(k) and 403(b) plans.

New 401(k)s and 403(b)s must be automatically enrolled and the deferrals automatically increased, beginning for plan years after December 31, 2024. At that time, 401(k) and 403(b) plans will be required to automatically enroll eligible employees at 3% (but not more than 10%) and thereafter automatically increase the deferral rates by 1% per year up to at least 10% (and if desired by the employer, up to a maximum of 15%). Defaulting participants must be invested in a QDIA (qualified default investment alternative).

Continue reading The SECURE Act 2.0: The Most Impactful Provisions (#1–Automatic Plans) →

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PTE 2020-02: The Remaining Steps: Retrospective Review and Correction of Compliance Failures (Part 1)


2020-02, Retrospective
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Key Takeaways

    • The next step in compliance with the DOL’s PTE 2020-02 is to conduct the annual retrospective review for 2022 and to reduce the review to a written report to be signed by a “senior executive officer.”
    • The review and report must be completed within 6 months after the end of the year.
    • In the process of conducting the review, it is likely that compliance failures will be discovered. To avoid prohibited transaction consequences, the failures must be corrected within 90 days of discovery and reported to the DOL within 30 days of correction.
    • The failures and corrections must also be included in the report.
    • There are a number of types of potential failures, some of which may be easy to correct and others of which will be more difficult.
    • Unfortunately, the DOL did not provide any guidance on how to correct failures. As a result, careful thought—with competent legal advice—should be given to the correction methodology.

Now that 2022 is behind us, the final steps in compliance with PTE 2020-02 must be satisfied. Those steps are (i) conducting the annual retrospective review and the resulting report (within six months) and (ii) correcting any compliance failures that are discovered in the course of the review.

The Review and Report are conditions to obtaining the relief afforded by the exemption. In other words, if they are not properly completed the protection is lost and all conflicted recommendations under the PTE are considered to be prohibited transactions. The consequence of having hundreds or even thousands of prohibited transactions is unimaginable. Here’s what the PTE says about the Retrospective Review and Report:

Continue reading PTE 2020-02: The Remaining Steps: Retrospective Review and Correction of Compliance Failures (Part 1) →

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Discretionary Management of IRAs: Conflicts and Prohibited Transactions


DOL, IRA, prohibited transaction
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Key Takeaways

  • 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.
  • There are other potential solutions, including transitioning the allocations to nondiscretionary advice.

Discussion

Both the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA) include prohibited transaction provisions that literally prohibit certain transactions (unless exempted by statute or by a prohibited transaction exemption). ERISA-governed qualified retirement plans are subject to both ERISA and Code prohibitions. However, standalone IRAs are only subject to the Code prohibitions. In that regard, Code sections 4975(c)(1)(E) and (F) provide:

(c) Prohibited transaction

(1) General rule

For purposes of this section, the term “prohibited transaction” means any direct or indirect—

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(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or

(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

Continue reading Discretionary Management of IRAs: Conflicts and Prohibited Transactions →

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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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Most Popular Insights for the Third Quarter


General

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.

  • Best Interest Standard of Care for Advisors #95: The Four Effective Dates for PTE 2020-02

    The DOL’s fiduciary interpretation and Prohibited Transaction Exemption (PTE) 2020-02 and its requirements were not all effective at the same time, causing some confusion. This article discusses the four effective dates or, more appropriately, enforcement dates.

  • Best Interest Standard of Care for Advisors #96: Annuity Recommendations, PTE 84-24, and Fiduciary Misunderstandings

    The DOL’s expanded interpretation of fiduciary advice as described in the preamble to Prohibited Transaction Exemption (PTE) 2020-02 applies to all rollover recommendations, including recommendations to roll over into annuities. A fiduciary recommendation to roll over from an ERISA-governed retirement plan results in a conflict of interest that is a prohibited transaction under the Internal Revenue Code and ERISA. This article discussed the DOL’s expanded interpretation in the context of the insurance industry, relief provided by PTE 2020-02 and PTE 84-24, and the conditions that must be satisfied for each.

  • Best Interest Standard of Care for Advisors #97: The SEC Requirements for Rollover Recommendations

    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. However, PTE 2020-02 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.

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