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DOL’s New Fiduciary Guidance for Rollovers: What Advisors Should Know

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What You Need to Know

  • The Labor Department has been clear from day one that offering rollover advice can cause an advisor to become subject to fiduciary standards.
  • The regular-basis prong of the five-part fiduciary test is satisfied when advice to roll over plan assets occurs as the beginning of an intended advisor-client relationship.
  • Advisors should continue to closely monitor IRS and DOL releases to avoid unpleasant future surprises related to fiduciary-standard enforcement.

Months ago, the Department of Labor released its latest take on the fiduciary standard for investment advice professionals. Now, we’re beginning to see details emerge that can help advisors understand their obligations under the new standard.

The most recent round of guidance paints a clear picture with respect to the Labor Department’s focus on rollover transactions, the new “regular basis” test and the fiduciary standard generally. Going forward, advisors should continue to monitor Labor releases for information about their obligations — and whether they’ll become subject to the new investment advice fiduciary standard for offering clients rollover advice.

Background

In 2020, the department released a new prohibited transaction exemption (PTE) as its long-awaited follow-up to the 5th Circuit’s removal of the 2016 fiduciary rule. The exemption grants relief to financial advisors and institutions that provide investment advice (including retirement-related and rollover advice) if the terms of the PTE are satisfied.

Generally, to qualify for relief under the new fiduciary PTE 2020-02, advisors must provide advice in accordance with impartial conduct standards, which generally include standards related to (1) acting in the client’s best interests, (2) reasonable compensation, (3) refraining from misleading statements, (4) disclosure, (5) conflict mitigation and (6) retroactive compliance review.

Initially, for fiduciary investment advice standards to apply, a person who is not otherwise a fiduciary must (1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property (2) on a regular basis (3) pursuant to a mutual agreement, arrangement or understanding with the plan, plan fiduciary or IRA owner that (4) the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that (5) the advice will be individualized based on the particular needs of the plan or IRA. This is the five-part test that applied prior to the 2016 Labor Department fiduciary rule.

The Labor Department has been clear from day one that offering rollover advice can cause an advisor to become subject to fiduciary standards. One point of interest, however, has been whether a single piece of rollover advice would be sufficient to satisfy the “regular basis” prong of the five-part test.

Latest Round of DOL Guidance

Initially, the latest Labor FAQ confirmed that the “regular basis” prong of the five-part investment advice fiduciary test is not satisfied when there is a single, discrete piece of advice recommending rolling over assets from a retirement plan to an IRA. However, the regular basis prong is satisfied when advice to roll over plan assets occurs as the beginning of an intended ongoing future relationship between an individual and investment advice provider. 

The first Labor FAQ focuses on rollover advice. Advisors who offer rollover advice should take note — as the Labor Department was extremely clear that advice to roll over assets from an employer-sponsored plan into an IRA will often — if not always — be considered fiduciary investment advice.

The current Labor take is clear. To quote FAQ #7, the department has stated that “when the investment advice provider has been giving advice to the individual about investing in, purchasing, or selling securities or other financial instruments through tax-advantaged retirement vehicles subject to ERISA or the Code, the advice to roll assets out of the employee benefit plan is part of an ongoing advice relationship that satisfies the regular basis prong.”

Note that the Department of Labor has also confirmed that, as set forth in new PTE 2020-02, Field Assistance Bulletin No. 2018-02 will remain effective until Dec. 20. FAB 2018-02 provided a temporary non-enforcement policy where Labor announced that it would not pursue prohibited transaction claims against investment advice fiduciaries who comply with the impartial conduct standards for transactions under the now-repealed best interest contract exemption or principal transactions exemption. 

The department also confirmed that it will not pursue action against someone who offered advice in accordance with the Deseret Letter between 2005 and Feb. 16, 2021.

Conclusion

To date, rollovers and the regular-basis prong have received the most significant attention from the DOL. Going forward, advisors should continue to closely monitor IRS releases to avoid unpleasant future surprises once the DOL begins enforcing the new standards in full force.

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