The New Fiduciary Rule (2): The Impact


2020-02, 84-24, DOL, fiduciary, IRA, rollovers
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The US 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.

Key Takeaways

  • The Department of Labor’s proposed fiduciary “package” will have different impacts on different types of service providers to retirement plans, participants, and IRA owners (collectively, “retirement investors”) . . . .investment advisers, broker-dealers, banks and trust companies, and insurance agents (and companies) (“financial professionals”).
  • The greatest impact of the changes, if finalized as is, will be on insurance agents, particularly independent producers. Insurance companies issuing the life insurance policies and annuity contracts will also see increased compliance burdens.
  • For all of the types of financial professionals, the most impactful change will likely be that one-time investment recommendations to private sector retirement plans and their participants, and to IRA owners, will be fiduciary advice. That includes rollover recommendations.

This post discusses the likely impact of the new proposals. Future posts will go into more detail about the proposals and compliance issues:

Continue reading The New Fiduciary Rule (2): The Impact →

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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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ERISA Moments: The New Fiduciary Proposal: An Overview of PTE 84-24 and its Impact


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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 New Fiduciary Proposal: An Overview of PTE 84-24 and its Impact, on the Spotlight on Benefits blog.

Spotlight on Benefits: ERISA Moments: The New Fiduciary Proposal: An Overview of PTE 84-24 and its Impact

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The New Fiduciary Rule (1): An Overview


2020-02, 84-24, DOL, fiduciary, IRA, rollovers
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The US 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.

Key Takeaways

  • One time investment recommendations to qualified and ERISA retirement plans and their participants, and to IRA owners, can be fiduciary advice. Plans, participants and IRA owners are referred to as “retirement investors”.
  • A rollover recommendation is one-time advice that will result in fiduciary status.
  • Fiduciary recommendations that result in compensation to a securities adviser (that is, to an investment adviser or broker-dealer) or to an insurance agent will be prohibited conflicts of interest, necessitating satisfaction of the conditions in a prohibited transaction exemption.

This blog post is an overview of the new proposals. Follow up posts will go into detail on each of the proposals.

The proposed fiduciary regulation—called the “Retirement Security Rule”–defines fiduciary advice as follows:

Continue reading The New Fiduciary Rule (1): An Overview →

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


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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.

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

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The DOL’s Regulatory Agenda and a New Fiduciary Rule


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


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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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Most Popular Insights for Spring 2023


SECURE 2.0

Each calendar quarter, I post approximately 12 articles on my blog. 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 SECURE Act 2.0: The Most Impactful Provisions #9 — Roth Treatment for Catch-up Contributions for Higher Compensated

Prior to the SECURE Act 2.0 all older participants, regardless of compensation level, could deduct their catch-up contributions. However, under the new law — beginning in 2024 — participants who earn more than $145,000 will only be able to make Roth catch-up contributions. As a result, those catch-up contributions will be taxable to those participants, but the contributions will not be taxable when withdrawn, and if held for the qualifying period, the earnings will not be taxable either.

The Secure Act 2.0: The Most Impactful Provisions #10 — Moving 529 Assets to a Roth IRA

Prior to the SECURE Act 2.0, if a 529 plan beneficiary did not use all of the funds for qualified education expenses (for example, the beneficiary graduated without using all of the funds in the 529), the options for withdrawal were not particular attractive. However, under the new law, those “excess” funds can be transferred to a Roth IRA for the 529 beneficiary, subject to certain limitations. As a result, contributions can now be made to 529 plans with the knowledge that, if not all of the funds are used for education of the beneficiary, the excess funds can be transferred to a Roth IRA for that beneficiary (and the other options, such as transferring the money to a 529 for a different beneficiary remain available).

The Secure Act 2.0: The Most Impactful Provisions #13 — Starter 401(k) Plans and Safe Harbor 403(b) Plans

Most employees who work for large and mid-sized employers have the opportunity to defer money from their paychecks into a savings-based retirement plan. That is not the case with many small employers, though, where large numbers of employees for firms that do not offer plans. However, savings-based plans are critical for employees to obtain financial security in retirement. There are studies that show that employees who can defer into retirement plans will save much more for retirement than those who do not have access to plans. Based on surveys, small employers do not offer plans because they are worried about the cost and administrative complexity of setting up and operating plans. To allay that concern, Congress created, in SECURE 2.0, a new type of plan that is simple and low cost.

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


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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.

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

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The DOL’s Fiduciary Interpretation and the Florida Court Decision


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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.)

Continue reading The DOL’s Fiduciary Interpretation and the Florida Court Decision →

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