What You Need to Know
- Come July, advisors must document in writing why they believe the rollover is in the client’s best interests.
- It’s important to consider the client's specific needs, including how they prefer to invest their funds and their risk tolerance.
- While DOL has not indicated that the SEC standard will apply when enforcing the rollover provisions, it has yet to provide guidance.
The Department of Labor’s Prohibited Transaction Exemption 2020-02 grants relief to financial advisors and institutions that provide investment advice if the terms of the PTE are satisfied. Advisors who offer rollover advice should, by this point, know that the Department of Labor was extremely clear that rollover advice will almost always be considered fiduciary investment advice under the newly interpreted standard.
Starting in July 2022, the terms of the PTE will become fully effective — meaning that advisors will be required to provide written documentation of the specific reasons why the advisor believes the rollover is in the client’s best interests. While the Labor Department hasn’t provided any specific examples of the types of “specific reasons” that would pass muster, many believe that the department will fall in line with the SEC interpretation when it comes time to enforce the rule — so advisors should brush up now to ensure they’re ready to comply come July.
DOL Fiduciary Standard and Rollovers: Background
For the fiduciary investment advice standards to apply, a person who is not otherwise a fiduciary must:
- 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.
- Do so on a regular basis.
- Provide advice pursuant to a mutual agreement, arrangement or understanding with the plan, plan fiduciary or IRA owner that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets.
- Ensure that the advice will be individualized based on the particular needs of the plan or IRA.
To quote the Department of Labor’s FAQ, “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.”
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.
When it comes to rollovers, the advisor must provide written documentation stating the specific reasons why the rollover was in the client’s best interests.
SEC Standard for Rollover Recommendations
The Securities and Exchange Commission’s Regulation Best Interest (Reg BI) and Investment Advisors Act each provide details on the considerations that should be accounted for when determining whether rolling over retirement assets between employer-sponsored plans and IRAs.