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DOL‘s New Rollover Rules Are Coming. Here’s How to Be Ready

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What You Need to Know

  • Most parts of the prohibited transaction exemption took effect on Feb. 16, 2021.
  • But the DOL agreed not to enforce until June 30, 2022, the specific rollover documentation and disclosure requirements.
  • July 1 is the deadline for internal rollover analysis and corresponding disclosure requirements to commence.

The Department of Labor’s Prohibited Transaction Exemption 2020-02 became effective on Feb. 16, 2021. But the Labor Department provided transitional relief through Jan. 31, 2022 — as well as specific relief until June 30, 2022, which is important for advisors to know.

Mainly, the DOL agreed not to enforce until June 30, 2022, the specific rollover documentation and disclosure requirements (i.e., internal rollover analysis and corresponding reasons for rollover recommendation) as required by the PTE.

Rollover Background

If an advisory firm recommends that a client roll over their retirement plan assets into an account to be managed by the firm (including from a current IRA), this creates both a conflict of interest and a prohibited transaction under the above-referenced PTE if the firm will earn new (or increase its current) compensation, or derive some other added economic benefit from such a rollover.

In conjunction with any such rollover recommendation, the firm should rely on the PTE exemptions below. For an exemption, the firm will need to demonstrate and document why such a recommendation was in the client’s best interest, which can include the client’s receipt of added services (i.e., planning and consulting services), lower fund expense ratios, more advantageous fund selection, etc.

Compliance with Impartial Conduct Standards is achieved by:

  • Providing investment advice that is in the client’s best interest.
  • Charging only reasonable compensation.
  • Making no materially misleading statements about the rollover and corresponding investment transaction(s).
  • Seeking to obtain the best execution of the investment transaction(s) reasonably available under the circumstances.

Further, the firm will need to provide a written fiduciary acknowledgment. This means it needs to provide a corresponding written disclosure to the client acknowledging that the firm and its representatives are fiduciaries under ERISA, the Code or both, as applicable. A written description regarding the services to be provided and the firm’s (and representative’s) material conflicts of interest must also be provided to the client.

The firm also is required to establish, maintain and enforce written policies and procedures prudently to ensure that it and its representatives comply with the ICS.

Keep in mind the annual Retrospective Review that is intended to assist in detecting and preventing violations of and achieving compliance with the ICS and the policies and procedures adopted for compliance with the PTE.

Important Dates

Although the deadline has passed for many Labor Department transitional exemptions, there are extensions to keep in mind. These include:

  • Feb. 1, 2021-June 30, 2022: All requirements of the DOL fiduciary rule come into effect, except the requirement to document and disclose the rationale behind the rollover recommendation.

Despite the safe harbor that expires on June 30, we recommend that firms implement the internal rollover analysis and corresponding disclosure process now. This is because the Securities and Exchange Commission has explicitly indicated that it views rollover recommendations as fiduciary recommendations under the Advisers Act, totally separate and apart from ERISA and the DOL rule. The SEC has included this issue on recent examinations (confirming that such rollover recommendations were made in the best interest of the client).

This also begins the time period that will need to be covered by your annual written Retrospective Review, which should cover the trailing 12-month period, and must be completed within six months of the end of the review period. The initial Retrospective Review will need to cover the time period of approximately Feb. 1, 2022 to Jan. 31, 2023. It must be completed by approximately July 30, 2023.

  •  July 1: The above internal rollover analysis and corresponding disclosure requirement must commence. This is the last aspect of the DOL rule that becomes effective, which means the rule will be fully implemented at this point (pending further delays).

Thomas D. Giachetti is chairman of the Investment Management and Securities Practice Group of Stark & Stark. He can be reached at [email protected].