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Get Ready for New DOL Rollover Rules on July 1

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What You Need to Know

  • Starting July 1, specific reasons for each rollover recommendation must be put in writing.
  • Generalized reasons for rollovers won't cut it, Erisa lawyer Fred Reish says.
  • Labor is still planning a new rule to define what constitutes fiduciary advice.

Advisors take note: Starting on July 1, advisors and firms under the Labor Department’s new fiduciary prohibited transaction exemption “will need to provide to the participant, in writing, the specific reasons why a rollover is in [their] best interest,” according to ERISA attorney Fred Reish, partner at Faegre Drinker.

“As a result, the analysis and recommendation needs to be personalized, or individualized, to the participant and his or her circumstances,” Reish told ThinkAdvisor Wednesday in an email.

Under Labor’s fiduciary PTE 2020-02, Improving Investment Advice for Workers & Retirees, which became effective on Feb. 16, when recommending rollovers, “advisors need to focus on the needs and circumstances of the participant, and then evaluate the investments, services and expenses of the plan versus the IRA,” Reish said.

Reish said that he’s concerned some firms “may be looking for generalized reasons why rollovers might be good for a typical or hypothetical participant. But that is not what the rules say. Instead, PTE 2020-02 says that the recommendation must be based on the financial circumstances, risk tolerance, needs and investment objectives of the particular participant.”

Then, beginning July 1, he continued, “the specific reasons for the rollover recommendation must be reduced to writing and provided to the participant.”

Attorneys and regulators, Reish said, “will undoubtedly look at the written reasons after the fact and see if they reflected the needs and circumstances of that participant.”

In its frequently asked questions guidance on the PTE, Labor also says that it is still planning a new rule to define what constitutes fiduciary advice.

As to further regulation of fiduciary investment advice, Labor states that it is “reviewing issues of fact, law, and policy related to PTE 2020-02, and more generally, its regulation of fiduciary investment advice.”

Labor “anticipates taking further regulatory and sub-regulatory actions, as appropriate, including amending the investment advice fiduciary regulation, amending PTE 2020-02, and amending or revoking some of the other existing class exemptions available to investment advice fiduciaries.”

Such actions will be preceded by notice and an opportunity for public comment.

The FAQ also sets out how Labor will enforce compliance with the exemption.

Reish explains in a recent blog post that DOL investigations “are often based on reviews of Forms 5500. The first 5500s for 2022 (when the PTE is first enforceable by the DOL) will be due on July 1, 2023. The investigations usually begin about a year after the Forms are filed. So the first 5500-based investigations will likely be in the summer of 2024.”

However, he continues, “investigations can be initiated for other reasons, as well. For example, a participant or fiduciary complaint filed with the DOL can cause an investigation.”

He added: “There is at least a chance that the DOL will do ‘survey’ investigations of the reports on the initial retrospective annual reviews. The deadline for the 2022 reviews and reports is June 30, 2023. So it’s possible that the DOL will be requesting those reports from select ‘financial institutions’ in the second half of 2023.”

Pictured: DOL headquarters in Washington. (Photo: Adobe Stock)


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