The DOL’s expanded interpretation of fiduciary advice is described in the preamble to Prohibited Transaction Exemption (PTE) 2020-02. The expanded interpretation applies to all rollover recommendations, including recommendations to rollover into annuities.
A fiduciary rollover recommendation to rollover from an ERISA-governed retirement plan results in a conflict of interest, which is the compensation from the individual retirement account or annuity.
That conflict is a prohibited transaction under the Internal Revenue Code and ERISA. PTE 2020-02 provides relief from the prohibitions if its conditions are satisfied.
One of the conditions for an insurance company to use PTE 2020-02 is that the insurance company and the investment professionals (including insurance agents) both be fiduciaries for the recommendations. However, most insurance companies have determined that they do not have the close relationships with agents, and particularly independent agents, to satisfy the fiduciary requirements in the PTE. As a result, most insurance companies have decided that they will not use PTE 2020-02 for relief for themselves and their agents from the prohibitions of the Code and ERISA.
But, when agents make rollover recommendations covered by the DOL’s expanded fiduciary interpretation, they will engage in prohibited transactions and need relief from the resulting prohibited transactions. The alternative to 2020-02 is PTE 84-24.
However, PTE 84-24 has conditions that agents must satisfy, and there are emerging stories that many agents do not know that they can be fiduciaries and do not know about the relief provided by 84-24.
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 (including transfer recommendations)–all of whom are referred to as “retirement investors.” With regard to IRAs, the term includes both individual retirement accounts and individual retirement annuities. In addition, in the preamble to the PTE, the DOL announced an expanded interpretation 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.
While it appears that most broker-dealers, investment advisers, and banks and trust companies will be relying on, and complying with, the conditions in PTE 2020-02, the same cannot be said of most insurance companies. As a result, when insurance agents recommend rollovers to annuities, they need to consider whether they are fiduciaries under the DOL’s expanded interpretation and, if so, how to comply with PTE 84-24 in order to avoid a prohibited transaction for their compensation, i.e., the commission and any trailing payments.