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Best Interest Standard of Care for Advisors #92: Consideration of Costs in the Evaluation of Rollovers


best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, rollovers, SEC
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Key Takeaways

The DOL’s expanded definition of fiduciary advice is 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.

In both its Regulation Best Interest (Reg BI) for broker-dealers and Interpretation Regarding Standard of Conduct for Investment Advisers (Investment Adviser Interpretation), the SEC said that rollover recommendations were subject to its best interest standard of care, which is similar to the DOL’s fiduciary and loyalty standards.

Both the DOL and the SEC also say that cost is a material consideration in evaluating rollovers. This article discusses that guidance.

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.

Under these standards, a rollover recommendation will ordinarily be nondiscretionary fiduciary advice and result in a financial conflict of interest that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is nondiscretionary, PTE 2020-02 can provide relief, but only if all of its conditions are met.

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Best Interest Standard of Care for Advisors #91: Rollover Recommendations to Participants in Government Plans


best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, registered investment advisers, rollovers, SEC
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Key Takeaways

The DOL’s expanded definition of fiduciary advice is 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.

However, the DOL’s guidance in the PTE does not apply to rollover recommendations to participants in government plans.

Rollover recommendations by broker-dealers and investment advisers to participants in government retirement plans are regulated by the SEC. Stated slightly differently, the SEC regulates rollover recommendations by broker-dealers and investment advisers to both private sector and government plan participants.

This article discusses the SEC regulation of rollover recommendations.

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.

Under these standards, a rollover recommendation will ordinarily be nondiscretionary fiduciary advice and result in a financial conflict of interest that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is nondiscretionary, PTE 2020-02 will provide relief, but only if all of its conditions are met.

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Best Interest Standard of Care for Advisors #90: Rollover Recommendations to Participants in Defined Benefit Plans


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Key Takeaways

The DOL’s expanded definition of fiduciary advice is 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.

While most rollover discussions are about recommendations to participants in 401(k) and 403(b) plans, the fiduciary definition is broader than that. For example, it also covers rollover recommendations to participants in defined benefit pension plans.

This article discusses how the fiduciary definition and PTE 2020-02 apply to defined benefit plans.

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.

A rollover recommendation will ordinarily be nondiscretionary fiduciary advice and will result in a financial conflict of interest that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is nondiscretionary, PTE 2020-02 will provide relief, but only if all of its conditions are met.

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Best Interest Standard of Care for Advisors #89: Rollovers and the Information That Is Needed About the Participant


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Key Takeaways

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

One of the conditions for relief is that a recommendation be in the best interest of a retirement investor (e.g., retirement plan, participant in a plan, or an IRA owner. A best interest process must consider the “investment objectives, risk tolerance, financial circumstances, and needs” of the retirement investor.

This article discusses the information needed about a participant in order to make a best interest 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.

The fiduciary regulations under 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.

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Best Interest Standard of Care for Advisors #88: Specific Reasons for Rollover Recommendations That Won’t Work (Part 2)


best interest, DOL, IRA, rollovers, SEC
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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.

This article discusses the requirement to give participants the specific reasons why the rollover recommendation is in their best interest (beginning July 1, 2022) and reasons that won’t work.

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.

The fiduciary regulations under 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 requirement in PTE 2020-02 that financial institutions and investment professionals provide participants with the “specific reasons” why a rollover recommendation is in the best interest of the participant.

Continue reading Best Interest Standard of Care for Advisors #88: Specific Reasons for Rollover Recommendations That Won’t Work (Part 2) →

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Best Interest Standard of Care for Advisors #87: Specific Reasons for Rollover Recommendations That Won’t Work (Part 1)


best interest, DOL, IRA, rollovers, SEC
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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.

This article discusses the requirement to give participants the specific reasons why the rollover recommendation is in their best interest (beginning July 1, 2022) and reasons that won’t work.

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.

The fiduciary regulations under 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.

Continue reading Best Interest Standard of Care for Advisors #87: Specific Reasons for Rollover Recommendations That Won’t Work (Part 1) →

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Best Interest Standard of Care for Advisors #57


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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.

Key Takeaways

  • The new fiduciary “rule”—Prohibited Transaction Exemption (PTE) 2020-02–has two parts. One part is the expanded interpretation of the definition of fiduciary advice (in the preamble to the PTE).
  • The expanded interpretation is just that—a broadening of the 5-part test in a 1975 regulation. The new interpretation dramatically changes the landscape of advice to participants (particularly for rollovers) and to IRA owners.
  • This article looks at a DOL FAQ that discusses the “regular basis” part of the 1975 regulation and explains how it reverses the prior DOL position–and how that change means that many, if not most, rollover recommendations will be fiduciary advice subject to ERISA’s prudent man rule.

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, the DOL announced, in the preamble to the PTE, 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.

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Best Interest Standard of Care for Advisors #56


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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.

Key Takeaways

  • The new fiduciary “rule”—Prohibited Transaction Exemption (PTE) 2020-02–has two parts.
  • The first part is the expanded interpretation of the definition of fiduciary advice (in the preamble to the PTE).
  • The second part is a prohibited transaction exemption.
  • The expanded interpretation is just that—a broadening of the 5-part test in a 1975 regulation. While a new interpretation of old rules may not seem that important at first blush, it dramatically changes the landscape of advice to participants (particularly for rollovers) and to IRA owners—both because of the application of the best interest standard and because certain prohibitions in ERISA and the Code only apply if a recommendation is fiduciary advice.
  • This article looks at a DOL FAQ that discusses the 5 parts of the 1975 regulation and comments on possible consequences of the DOL’s new interpretation.

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”).

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Best Interest Standard of Care for Advisors #55


best interest, DOL, fiduciary, investment adviser, IRA, prohibited transaction, rollovers
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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.

Key Takeaways

  • The new fiduciary “rule”—Prohibited Transaction Exemption 2020-02–has two parts.
  • The first part is the expanded definition of fiduciary advice (in the preamble to the PTE).
  • The second part is the prohibited transaction exemption.
  • However, changes are being considered for both the definition and the exemption (as well as for other exemptions for nondiscretionary fiduciary advice). This article discusses the likely changes and the DOL’s regulatory agenda.
  • The change to the fiduciary definition will likely cause even more advisors and agents (and their firms) to be fiduciaries for plans, participants and IRA owners.
  • The changes to the exemptions will impose additional compliance burdens on investment advisers, broker-dealers, banks and insurance companies.

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”).

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Best Interest Standard of Care for Advisors #54


best interest, DOL, fiduciary, investment adviser, IRA, prohibited transaction, rollovers
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The Department of Labor’s “Fiduciary Rule,” PTE 2020-02: An Overview

This article is an overview of the requirements of PTE 2020-02. It discusses the expanded fiduciary definition, the conditions in the PTE, and the DOL’s non-enforcement policy in effect until December 20, 2021.

Key Takeaways

    • Broker-dealers, investment advisers, insurance companies and banks (“financial institutions) are already subject to the expanded fiduciary definition for advice to plans, participants and IRAs, including recommendations to rollover plan benefits to an IRA.
    • The new fiduciary “rule” has two parts with their own effective dates. The first part, the expanded definition of fiduciary advice, became effective for enforcement purposes on February 16.
    • The second part, the prohibited transaction exemption, also became effective on February 16, but a non-enforcement policy delayed the enforcement of most, but not all, of its conditions to December 21.That non-enforcement requires satisfaction of the Impartial Conduct Standards (ICS).The non-enforcement policy applies to the DOL and IRS, but does not impact private rights of action.
    • Financial institutions need to have practices in place now to comply with the ICS, and then, before December 21, need to have disclosures, policies, practices and processes in place for compliance with the full exemption. Because of the volume of work to be done, that work should be underway by now.
    • This article is a summary of the work to be done.

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”).

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