Tag Archives: incentive

The New Fiduciary Rule (37): Confusion about Incentive Compensation


2020-02, 84-24, DOL, fiduciary, prohibited transaction
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Key Takeaways

    • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23 one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the protection afforded by a prohibited transaction exemption will be needed.
    • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
    • The PTE that may be used in all cases, and must be used in most cases, is PTE 2020-02. However, independent insurance agents may use PTE 84-24.
    • Both PTEs have provisions limiting incentive compensation.

The Department of Labor has issued its final regulation defining fiduciary status for investment advice to retirement investors and the related exemptions for prohibited conflicts—PTEs 2020-02 and 84-24. The exemptions provide relief from prohibited compensation resulting from fiduciary recommendations to “retirement investors”—private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including recommendations of transfers and exchanges). The fiduciary regulation will be effective on September 23, 2024. Parts of the PTEs will be effective on that date, but other parts will not be effective until a year later—September 23, 2025.

The split effective dates for the PTEs are as follows. The Impartial Conduct Standards and the Fiduciary Acknowledgement disclosure are effective September 23, 2024—this year. The remaining conditions in the PTEs are effective on September 23, 2025. That includes all of the remaining disclosures, the policies and procedures, and the annual retrospective review.

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The New Fiduciary Rule (17): Permissible Compensation under PTE 84-24


84-24, fiduciary, prohibited transaction
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The U.S. 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 recommendations to retirement plans, participants (including rollovers), and IRAs.

Key Takeaways

  • ERISA’s fiduciary and prohibited transaction rules require consideration of costs and compensation when fiduciary recommendations are made to “retirement investors,” that is, to private sector retirement plans, participants in those plans, and IRA owners.
  • Where the Internal Revenue Code’s prohibited transaction rules would be violated, the protection of an exemption is needed. In that case, the protections of PTEs 84-24 and 2020-02 will require that costs and compensation be considered.
  • This article focuses on limitations on compensation under PTE 84-24.
  • While the general rule in ERISA and the Code is that compensation cannot be more than a reasonable amount, the PTE has additional limitations.

ERISA’s fiduciary responsibility rules require that costs, for investments, insurance products and services, be no more than a reasonable amount. In other words, a prudent process will consider the costs of products and services relative to their value to the retirement investor and relative to reasonably available alternatives. ERISA’s prohibited transaction rules, and the exemptions to the prohibitions, impose a similar limit on compensation when a fiduciary recommendation is conflicted, that is, the compensation cannot be more than a reasonable amount when compared to the value of services being offered. These rules apply to all ERISA-governed retirement plans and participant accounts in those plans (including rollover recommendations).

The Code has prohibited transaction provisions with similar limitations on compensation, that is, compensation cannot exceed a reasonable amount relative to the services provided. The Code limits apply to both tax-qualified retirement plans and IRAs (including individual retirement annuities). However, the Code does not have a standard of care for recommendations to IRA owners. Instead, the applicable standard of care is imposed by other laws and regulations (for example, the best interest standard for insurance agents in NAIC model rule 275).

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The New Fiduciary Rule (16): Permissible Compensation under PTE 2020-02


2020-02, broker-dealers, fiduciary, investment adviser, prohibited transaction
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The U.S. 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 recommendations to retirement plans, participants (including rollovers), and IRAs.

Key Takeaways

  • ERISA’s fiduciary and prohibited transaction rules require consideration of costs and compensation when fiduciary recommendations are made to “retirement investors,” that is, to private sector retirement plans, participants in those plans, and IRA owners.
  • Where the Internal Revenue Code’s prohibited transaction rules would be violated, the protection of an exemption is needed. In that case, the protections of PTEs 84-24 and 2020-02 will require that costs and compensation be considered.
  • This article focuses on limitations on compensation under PTE 2020-02. However, compensation of advisors and their firms is often an element of the costs of the services and products, and thus can also be part of the consideration of costs.
  • While the general rule in ERISA and the Code is that compensation cannot be more than a reasonable amount, the PTE has additional limitations.

ERISA’s fiduciary responsibility rules require that costs, for both investments and services, be no more than a reasonable amount. In other words, a prudent process will consider the costs of investments and services relative to the value of those investments or services to the retirement investor and relative to reasonably available alternatives. ERISA’s prohibited transaction rules, and the exemptions to the prohibitions, impose a similar limit on compensation when a fiduciary recommendation is conflicted, that is, the compensation cannot be more than a reasonable amount when compared to the value of services being offered. These rules apply to all ERISA-governed retirement plans and participant accounts in those plans (including rollover recommendations).

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