A Closer Look at the DOL’s Proposed Rollover Rule

The Department of Labor on Oct. 31 released a proposed rule defining who is an investment advice fiduciary for purposes of the Employee Retirement Income Security Act, along with proposed amendments to class prohibited transaction exemptions available to investment advice fiduciaries, including PTE 2020-02, aka the “rollover rule.”

I recently spoke with my colleague Joe Antonakakis to learn more about the proposed rule. He said the amendments reaffirm the DOL’s commitment to ensuring that fiduciary investment advice is provided in retirement investors’ best interest.

The proposed amendments must undergo a notice and comment process prior to becoming effective. The future effective date would be 60 days after the publication of a final amendment. Please note: PTE 2020-02 and all requirements thereunder will remain effective until the effective date of a final amendment.

The DOL’s proposed updates maintain the core principles of the rollover rule, including: providing advice in clients’ best interest; acknowledging fiduciary status in writing; disclosing services and material conflicts of interest; adhering to impartial conduct standards; performing a rollover analysis (including documenting and disclosing the specific reasons that any rollover recommendations are in retirement investors’ best interest); and conducting an annual retrospective review.

Fiduciary Definition

Under the proposed rule, Labor replaces the five-part fiduciary test with a proposed presumption that a financial services provider is an investment advice fiduciary if:

• The provider provides investment advice or makes an investment recommendation to a retirement investor.
• The advice or recommendation is provided for a fee or other compensation.
• The financial services provider makes the recommendation in the context of a professional relationship in which investors would reasonably expect to receive sound investment recommendations that are in their best interest.
• The provider has discretion over investment decisions for the retirement investor.
• The provider makes investment recommendations to investors on a regular basis as part of the business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.
• The provider states that he or she is acting as a fiduciary when making investment recommendations.

Based on the above, the proposed rule creates a presumption of fiduciary status with respect to any interaction between a financial institution and a retirement investor.

The proposed rule also brings into focus rollover advice between institutions. In instances where one financial institution assists another with the provision of rollover advice, both financial institutions fall under the new fiduciary definition.

IRS Form 5330

The proposed amendments would require financial institutions, including investment advisors, to report any non-exempt prohibited transactions in connection with fiduciary investment advice by filing IRS Form 5330, correcting those transactions and paying any resulting excise taxes.

Violation of this aspect of the proposed rule could result in ineligibility to rely on the exemption.

Best-Interest Standards

The proposed amendment retains the best-interest standard from PTE 2020-02. In other words, all investment advice must be, at the time it is provided, in the best interest of the retirement investor.

Best-interest advice: (1) reflects the care, skill, prudence and diligence that a prudent person would use based on the investment objectives, risk tolerance, financial circumstances and needs of the retirement investor, and (2) does not place the financial or other interests of the investment professional, financial institution or other party ahead of the interests of the retirement investor.

Reasonable Compensation and Best Execution

The proposed amendment retains the reasonable compensation and best execution standards from PTE 2020-02, with minor adjustments. Compensation received by the financial institution or investment professional must not exceed reasonable compensation within the meaning of ERISA, and the financial institution must seek to obtain the best execution of the recommended transaction.

Photo Illustration: Chris Nicholls/ALM; photos of Acting Labor Secretary Julie Su and President Joe Biden, Bloomberg; photo of DOL headquarters: Shutterstock