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Regulation and Compliance > Federal Regulation

The New Rollover Rule Is Here: Are You Complying?

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What You Need to Know

  • If your firm recommends that a client should or should not roll over their assets, you must disclose why the recommendation is in their best interest.
  • Alternatively, your firm can provide only educational materials to a client. Such materials do not constitute a recommendation.
  • If you provide a recommendation, you must disclose to the client in writing the reasons that the recommendation is in their best interest.

The new Department of Labor rule is now in effect. Is your firm doing everything required to comply with the new retirement rollover requirements as set forth in PTE 2020-02?

I recently sat down with my colleague, Joe Antonakakis, to discuss compliance with the new ruleAntonakakis explained that the rule is designed to promote investment advice that is in the best interest of retirement investors (e.g., plan participants and beneficiaries, and IRA owners).

The exemption conditions emphasize mitigating conflicts of interest and ensuring retirement investors are receiving advice that is both prudent and in their best interest. It also expressly covers prohibited transactions resulting from both rollover advice and advice on how to invest assets within a plan or IRA. 

If your firm plans to make a recommendation on whether a client should or should not roll over their assets, you are acting as a fiduciary and are required to conduct a thorough analysis, and document and disclose the specific reasons that any rollover recommendation is in the client’s best interest.

Several factors can be considered in this analysis, including the alternatives to a rollover, the fees and expenses associated with the accounts, whether administrative expenses are covered, the different levels of services and investments available, the long-term impact of any increased costs, why the rollover is appropriate despite any additional costs, and the impact of economically significant investment features such as surrender schedules and index annuity cap and participation rates. 

No recommendation. As an alternative to making a recommendation, your firm can provide educational materials to a client. These materials should be general in nature and should serve a strictly educational purpose. Such materials do not constitute a recommendation.

Client affirmation and disclosure. Whether you provide a rollover recommendation or provide only educational materials, your client should acknowledge the results of your analysis or discussion.

If you provide a recommendation, you are required to provide a written disclosure to the client of the results and factors used to complete the best interest analysis discussed above. If you  provide only educational materials and a client determines on their own to conduct a rollover, the client should acknowledge that the rollover was directed solely by them, and that the firm did not solicit the rollover or make any recommendation.

Retrospective review. A requirement of the rule is the pending retrospective review requirement. To comply, a firm is required to catalog compliance policies and procedures throughout the year and conduct an annual review.

The review extends past rollover recommendations into all policies and procedures regarding the firm’s fiduciary standard of conduct, including the firm’s mutual fund share class selection policy, fiduciary duty policy, portfolio management policy, retirement accounts and ERISA matters policy, portfolio valuation/reconciliation policy, advisory agreements and fees policy, and wrap fee/asset-based pricing policy, among others.

The written report is required to be reviewed by a senior executive officer of the firm. This retrospective review, report and certification must be completed no later than six months after the end of the period covered by the review. The initial retrospective review must be completed by July 1, 2023.

How can I obtain information about an individual’s existing plan when conducting the best interest analysis? And what if a client cannot or will not provide information? The Department of Labor Employee Benefits Security Administration provided guidance on this and other issues in its April 2021 FAQs.

To satisfy the documentation requirement for rollovers from an employee benefit plan to an IRA, 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.

In general, such information should be readily available as the result of Labor Department regulations mandating disclosure of plan-related information to the plan’s participants. If the retirement investor won’t provide the information, even after a full explanation of its significance, and the information is not otherwise readily available, the financial institution and investment professional should make a reasonable estimation of expenses, asset values, risk, and returns based on publicly available information.

Am I required to share the outcome of a rollover analysis with the client? Yes. If you provide a recommendation, you are required to provide a written disclosure to the client of the specific reasons that the recommendation to roll over assets is in their best interest.


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

(Image: Shutterstock)