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Fred Reish, ERISA lawyer

Retirement Planning > Saving for Retirement

4 Tips to Avoid Rollover Problems Under New DOL Rule

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A new rule from the Labor Department for advisors and firms working with potential client rollovers went into effect Friday.

In a webinar Thursday, Faegre Drinker partners Fred Reish and David Porteous teamed with Fiduciary Decisions CEO Tom Kmak to share insights on potential compliance problems with the new prohibited transaction exemption, PTE 2020-02. Here are some key takeaways from the webinar to help you avoid compliance problems.

1. Understand the Exemption’s Requirements and Scope

Reish has observed several compliance errors in this area, including:

  • Firms are not providing retirement investors with the newly required fiduciary status acknowledgement
  • Some firms don’t realize that the new rules apply to both plan-to-IRA and IRA-to-IRA rollover recommendations
  • There have been failures to disclose that both types of rollover recommendations are conflicts of interest
  • Firms and advisors lacking policies and procedures to mitigate rollovers’ conflicts of interest

2. Tighten Up Your Best-Interest Process

The exemption requires that advisors understand a participant’s circumstances and objectives. In order to make an objective rollover recommendation, though, you also need to have detailed information about the available alternatives, investments, services and expenses in the participant’s current plan. You’ll need the same information about the rollover IRA account. With those two sets of information, Reish said, it’s possible to “evaluate the plan and IRA information in light of the retirement investor’s profile.” 

Additionally, under the new rule, retirement clients must be provided with specific, written reasons why a rollover recommendation is in their best interest. Consistently collecting, analyzing and presenting all the required information makes the case that advisors should adopt and follow a written process workflow for both internal use and with the client.

3. Collect the Data

Details on your firm’s rollover IRA normally will be available but be prepared for possible challenges collecting the required data on some participants’ plans. In FAQ No. 15 of its PTE 2020-02 guidance, the department explains that it’s not an optional step: “… investment professionals and financial institutions should make diligent and prudent efforts to obtain information about the existing employee benefit plan and the participant’s interests in it.”

The department writes that the required information should be “readily available” in the disclosure documents plans give their participants.

But what happens if the participant doesn’t have and won’t request the plan’s information? The exemption recognizes that possibility and recommends the investment professional and the firm make a reasonable estimation of expenses, asset values, risk and return based on publicly available information.

Here’s the catch: If you’re forced to work with publicly available information, you must document and explain the assumptions behind the information you use and its limitations.

4. Get Specific in Writing

Generic reasons supporting your rollover recommendation — “Our rollover IRA offers a broad range of investment alternatives with professional account management”— won’t work with the regulators. Your rollover review and recommendation process must get into the specifics of why your IRA is superior to the available alternatives for the particular investor.

Reish noted that the DOL is looking for an “objective, professional analysis by the advisor of what’s in the best interest of the investor—that’s what’s expected.”

The DOL’s FAQ no. 15 gives several examples of the factors that should be considered in the analysis. For plan-to-IRA rollovers, these include, among others:

  • the alternatives to a rollover, including leaving the money in the employer’s plan, if permitted
  • the fees and expenses in both options
  • whether the employer pays for some or all of the plan’s administrative expenses
  • the different levels of services and investments available under the plan and the IRA.

For IRA-to-IRA transfers, the DOL cites plan advisor compensation (fee-based or commission-based), available services, long-term costs and the “impact of economically significant investment features such as surrender schedules and index annuity cap and participation rates.”

Ed McCarthy is a freelance financial writer who holds the Certified Financial Planner and Retirement Income Certified Professional designations.


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