- 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.
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
For purposes of this section, the term “prohibited transaction” means any direct or indirect—
(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
The Department of Labor’s “Fiduciary Rule,” PTE 2020-02: The FAQs
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.
The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice.
- In FAQ 21, the DOL discussed how it would enforce compliance with the exemption.
- As a starting point, the DOL has the authority to interpret and enforce the requirements of the PTE as they apply to retirement plans, including recommendations to participants to take their benefits out of a retirement plan and roll to an IRA.
- In addition, under ERISA there are private rights of actions for breaches of fiduciary duties to plans and participants, including recommendations to rollover.
- In addition, while the DOL does not have investigative or enforcement authority for violations of the conditions of the exemption for non-ERISA vehicles, such as IRAs, if it finds those violations it will refer them to the IRS.
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 (“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.
Continue reading Best Interest Standard of Care for Advisors #83: Compliance with PTE 2020-02: Enforcement of the Exemption