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Dave Goldman, Chief Business Officer, Pontera

Regulation and Compliance > Federal Regulation > DOL

DOL’s Rollover Reckoning Opens Doors for Advisors

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What You Need to Know

  • Beginning July 1, advisors recommending rollovers will have to document and prove that clients will be better off after the move.
  • The new regulation may put a damper on the workarounds many advisors use to manage clients’ employer-held retirement accounts,
  • Advisors will be challenged to adopt new solutions for managing, monitoring and trading client assets.

The Department of Labor’s (DOL) enforcement of Prohibited Transaction Exemption (PTE) 2020-02, creates new challenges that many advisors will face when considering rollover advice for retirement accounts. For well-positioned advisors, however, the new PTE presents a significant opportunity to stand out in the marketplace, build trust and manage their clients’ retirement wealth more holistically.

On February 1, the department began enforcing compliance with the Impartial Conduct Standards, the policies and procedures requirements and most disclosure requirements.

On Friday, it will begin enforcing the documentation and disclosure requirement to provide the specific reasons why a rollover is in the best interest of the participant. The rule clarifies how advisors should offer guidance on their clients’ retirement accounts when conflicted advice is given (e.g., to roll over), as well as how and when they can collect fees for that work.

The spirit of the fiduciary rule potentially pushes advisors away from making recommendations for many investments if they lack the ability to monitor the client accounts where those investments are held and if the participant lacks the knowledge to prudently monitor the investments or allocations.

Effective Friday, the rule will also challenge the de facto method of causally recommending that participants roll over employer-sponsored retirement accounts when clients retire. While rolling these accounts over makes sense for many clients as they enter the distribution phase, the rule challenges advisors to document and prove that these investments will be better off being rolled over (and that any additional expenses are justified).

The Problem With Stopgap Advice During Clients’ Earning Years

To the detriment of their clients, some advisors today see advising on assets that are held at retirement plan recordkeepers as more trouble than it’s worth. However, Russell Investments’ 2022 Value of an Advisor study found that professional management of accounts can add up to 4.9% in additional annual returns. Compounded over time, that can significantly improve an individual’s financial situation.

Understanding this, many advisors utilize workarounds to manage clients’ retirement accounts, such as asking clients to place trades themselves or storing credentials for individual accounts to place trades on behalf of their clients.

These approaches both carry risk for advisors. Those who store client credentials must subject themselves to time-consuming and costly custody audits and run the risk of losses due to a data breach, including potential reputational damage.

Others who provide advice without placing trades fail to provide clients with truly holistic wealth management. Those advisors may lack insight into plan investment details, options, and fees, resulting in sub-optimal recommendations.

In addition, when they rely on the client to place trades, the recommendations may not be implemented. And without regular monitoring of the account, clients could make catastrophic changes rooted in emotion during periods of high volatility.

Both ERISA’s fiduciary rule and the new DOL rule increase the risk of utilizing these stopgap approaches. The PTE explicitly requires that advisors and institutions “carefully consider whether certain investments can be prudently recommended to the individual Retirement Investor in the first place without ongoing monitoring.”

This means that advisors should have the means to analyze plan investment documentation, including for opaque private funds, and also have the ability to continuously monitor their recommendations once made.

Under the new guidance, we believe that the ongoing monitoring of a client’s overall portfolio, not only for performance but an understanding of the available fund lineup, expenses, etc., is required to fulfill an advisor’s fiduciary duty.

Advisors Can No Longer Wait for a Rollover Event to Create Value

With these concerns in mind, many advisors refrain from managing their clients’ retirement plan assets during the accumulation phase, preferring instead to wait until the assets can be rolled over to an advisor-managed individual retirement account (IRA). Not only does this detract from potential performance as discussed above, but this “safer” method of advising on held-away accounts also will now incur greater scrutiny from the DOL.

Under the new guidance, advisors who provide rollover recommendations and who will be providing ongoing investment advice to the rollover IRA will be acting in a fiduciary capacity.

As fiduciaries, advisors must consider the options available to their clients when considering a rollover:

  • Leave them in the plan (potentially with a different allocation)
  • Roll them over to an IRA managed by the advisor
  • Roll the assets into a new 401(k)

If advisors recommend that clients roll over their assets, they must justify why the recommendation is in their clients’ best interest and must provide the clients with written “specific reasons” why the rollover recommendation is in the best interest of the clients. That includes an analysis of the plan’s investments and expenses.

A Better Approach

The updated DOL guidance will challenge advisors looking to advise on defined contribution accounts on 401(k) platforms on two fronts:

Closing the client advice gap: Those who wish to advise on assets within an employer-sponsored plan that are held on retirement plan platforms must have a solution for managing, monitoring and trading client assets.

While a combination of account aggregation software and manual trade placement may be sufficient, an all-in-one trading and monitoring platform is the clearest and most compliant path forward for most advisors while delivering the best overall service and outcomes for investors,

Setting expectations with clients: Advisors will face additional scrutiny around conflicts of interest when it comes to rollover recommendations. If an advisor begins managing their clients’ employer-sponsored retirement accounts (and charging the same fee across clients’ held away and custodied accounts) earlier in the client relationship, he or she essentially eliminates rollover conflict.

In addition, the advisor will have access to the information about the plan’s investments and expenses that are needed to provide a prudent rollover recommendation.

Advisors today have an opportunity to better prepare their clients for retirement on two fronts. First, there is more incentive than ever to begin managing clients’ employer-sponsored retirement accounts early, driving incremental returns over your clients’ working years and reducing potential conflict when (and if) a rollover is appropriate.

Second, it is more important than ever for advisors to utilize a platform that allows them to trade and monitor these accounts securely, compliantly and continuously.

Dave Goldman is the chief business officer at Pontera, a fintech platform that enables advisors to manage and trade their clients’ retirement accounts including 401(k)s and 403(b)s as part of a holistic portfolio.


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