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 rule. Antonakakis 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.