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Best Interest Standard of Care for Advisors #86: Information Needed for Rollover Recommendations


best interest, DOL, fiduciary, IRA, rollovers
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Key Takeaways

The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice, particularly for rollover recommendations.

The DOL’s expanded definition of fiduciary advice was described in the preamble to PTE 2020-02.

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

A number of my earlier articles have discussed the requirements that PTE 2020-02 imposes on rollover recommendations.

This article discusses the need for information about the plan and the participant’s interests in the plan in order to develop a compliant rollover recommendation.

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.

In the preamble to the PTE, the DOL described its expanded definition of fiduciary advice. The fiduciary regulations in 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.

This article focuses on the information that is needed to make a compliant rollover recommendation and particularly about information concerning the participant’s interest in the plan.

Continue reading Best Interest Standard of Care for Advisors #86: Information Needed for Rollover Recommendations →

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Best Interest Standard of Care for Advisors #68: Compliance with PTE 2020-02: Factors to Evaluate for a Rollover Recommendation (Part 4)


2020-02, best interest, DOL, fiduciary, investment adviser, IRA, rollovers
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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. One of the requirements is that the investment professional and the financial institution obtain information about the participant’s plan and account. The preferred approach is to use “primary” data (that is, actual and current plan data), but in some circumstances “alternative”, or secondary, data can be used.
  • The requirement that a rollover recommendation from a plan to an IRA satisfy the best interest standard of care already applies, since the DOL non-enforcement policy delays the exemption conditions but not the fiduciary definition.

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 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. The first article in this subseries, Best Interest #65, quoted the full Q & A. This week’s article focuses on the use of primary plan data and alternative plan data.

Continue reading Best Interest Standard of Care for Advisors #68: Compliance with PTE 2020-02: Factors to Evaluate for a Rollover Recommendation (Part 4) →

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