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

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.

In addition, in the preamble of the PTE the DOL interpreted other parts of the test. However, the most controversial was the reinterpretation of the “regular basis” prong.

The PTE first became effective on February 1, 2022 (with additional conditions becoming effective on July 1, e.g., the requirement to give participants a written statement of why a rollover recommendation is in their best interest).

However, two lawsuits were filed challenging the reinterpretation and other parts of the preamble and the PTE.

The Present

The first decision was handed down in February 2023. A Florida Federal District Court decided that the DOL was wrong in connecting the rollover recommendation with the subsequent investment advice to the rollover IRA in order to satisfy the “regular basis” test. In other words, the court decided that the fiduciary definition would not apply in that circumstance and therefore the rollover recommendation was not a fiduciary act. As a result, such a rollover recommendation would not result in a prohibited transaction (and therefore the relief provided by PTE 2020-02 was not needed). However, the Court also held that, the PTE was properly issued and its relief would be needed where an advisor is a fiduciary for a rollover recommendation.

More recently, a magistrate in a Texas Federal District Court proceeding has issued her recommendations to the judge in that case. The magistrate agreed with the holding in the Florida case that a rollover recommendation to a participant could not be connected with subsequent investment advice for the rollover IRA. As a result, in those circumstances the “regular basis” prong of the 5-part test would not be satisfied and the rollover recommendation would not be fiduciary advice.

However, the magistrate also concluded that the DOL’s interpretations of other parts of the 5-part test were permissible. In addition, the magistrate concluded that the DOL’s withdrawal of the Deseret advisory opinion was permissible. (In the Deseret opinion, the DOL had said that a rollover recommendation was not fiduciary advice where the advisor was not a fiduciary to a plan.) The effect of that withdrawal is that the DOL is no longer bound to follow its conclusions and may be free to assert fiduciary status for rollover recommendations under appropriate circumstances.

For the rest of this article, I will assume that the Texas judge accepts the recommendations of the magistrate.

The Future

So, where does that leave us?

First and foremost, it is inconceivable that the DOL would abandon its efforts to impose fiduciary status on rollover recommendations. But, because of these cases (including the 5th Circuit’s decision in the Chamber of Commerce case, a new regulation will be needed to accomplish that result.

Consistent with that thought, the DOL included the following on its regulatory agenda:

Title: Conflict of Interest in Investment Advice


This rulemaking would amend the regulatory definition of the term fiduciary set forth at 29 CFR 2510.3-21(c) to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code. The amendment would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest. In conjunction with this rulemaking, EBSA also will evaluate available prohibited transaction class exemptions and propose amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors. [The bolding is mine.]

The due date for the proposed regulation and exemptions is August 2023.

But how could the regulation avoid the court decisions about the current reinterpretation and the 2018 5th Circuit Chamber of Commerce decision about the Obama era fiduciary regulation?  Here are some thoughts:

  • The DOL could define fiduciary status as a “relationship of trust and confidence”. The 5th Circuit pointed to that phrase as an appropriate description of a fiduciary and the Texas magistrate referred to that language. That definition could be difficult for advisors because, to avoid fiduciary status, they would need to argue that they do not have relationships of “trust and confidence” with retirement investors (e.g., participants). But it would be consistent with what the courts have said (and with a long-standing definition of fiduciary status generally).
  • The DOL could eliminate the “regular basis” prong from the 5-part test, resulting in a 4-part test. While on its face it conflicts with the reasoning in the Chamber of Commerce opinion, the DOL could argue that much has changed since 2018. For example, the SEC’s Regulation Best Interest for broker-dealers now imposes a best interest standard for rollover recommendations, with process requirements similar to the DOL’s best interest standard in PTE 2020-02. Similarly, the SEC’s 2019 Interpretation for Investment Advisers says that a rollover recommendation is a fiduciary act. In both cases, the rollover recommendation, standing alone, is covered by the standards of care. In other words, neither has a multi-part test. In that regard, the DOL could argue that it is amending its fiduciary regulation to be consistent with SEC guidance and with modern practices. The language in the DOL’s regulatory agenda suggests such an outcome (see the bolded phrases).
  • Going beyond the fiduciary regulation, it is also possible, but perhaps not likely, that the DOL could amend its 408(b)(2) regulation to define what constitutes a “reasonable arrangement” when a service provider (that is, an advisor) recommends a rollover to a participant. Since a recommendation to a participant about the participant’s account is considered advice to a plan, the DOL could possibly say that, in order for the arrangement to be reasonable (even if the advisor is not a fiduciary), certain disclosures needed to be made and that the plan’s investments, services and expenses needed to be considered.

Concluding Thoughts

If the DOL meets its August deadline, we will know its approach soon enough.

Once the proposed regulation is published in the Federal Register, there will be a 30 or 60-day comment period. Once the comment period closes, the DOL will review the comments and draft the final regulation. When ready, it will go to the Office of Management and Budget in the White House. It usually takes the OMB 45 to 75 days to vet and release a regulation. So, as a practical matter, the final regulation will not be effective until next year.

A Word of Caution

As I read the Court opinions and recommendations, the DOL filings and the preamble to PTE 2020-02, it appears that the DOL continues to believe that, if an advisor is a fiduciary to a retirement plan (including to a participant’s account in a plan), a rollover recommendation to a participant in that plan (or to the particular participant that is being advised by the fiduciary advisor) will still be treated as a fiduciary recommendation.

As a result, where a broker-dealer (e.g., a dual registrant) or an RIA is a fiduciary to a plan or a participant, the risk of a rollover recommendation being a fiduciary act could be mitigated by continuing to satisfy the conditions of the PTE.

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.