Investment adviser firms advising plan participants on IRA rollovers should review the recently published guidance of the U.S. Department of Labor (“DoL”) regarding PTE 2020-02, a new fiduciary advice prohibited transaction exemption. Compliance with PTE 2020-02 now permits investment advisers to provide advice regarding IRA rollovers without violating Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code of 1986 (“IRC”), both of which prohibit investment advisers from receiving payments that create a conflict of interest when providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners. The adoption of PTE 2020-02 follows several years of rulemaking, court actions, and DoL guidance regarding the definition of fiduciary investment advice and clarifies that advice regarding IRA rollovers is considered a fiduciary activity, in contrast to the DoL’s prior interpretation.
The following are the links to the U.S. Department of Labor’s “New Fiduciary Advice Exemption: PTE 2020-02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions,” and the full text of PTE 2020-02.
Requirements of PTE 2020-02
The conditions set out in PTE 2020-02 are designed to ensure that fiduciary investment advice given to retirement plan sponsors, plan participants, and IRA owners is in the best interest of the retirement investor, despite any conflicts of interest the investment adviser may have. Although an investment adviser’s best course of action is to eliminate conflicts entirely, the DOL recognizes that there may be limited circumstances where conflict mitigation, rather than complete elimination, is a reasonable alternative.
The new prohibited transaction exemption requires investment advisers and other covered financial institutions providing fiduciary advice to:
- Acknowledge their fiduciary status in writing,
- Disclose their services and material conflicts of interest,
- Adhere to Impartial Conduct Standards requiring that they
- Investigate and evaluate investments, provide advice, and exercise sound judgment in the same way that knowledgeable and impartial professionals would (i.e., their recommendations must be “prudent”),
- Act with undivided loyalty to retirement investors when making recommendations (in other words, they must never place their own interests ahead of the interests of the retirement investor, or subordinate the retirement investor’s interests to their own),
- Charge no more than reasonable compensation and comply with federal securities laws regarding “best execution,” and
- Avoid making misleading statements about investment transactions and other relevant matters,
- Adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and to mitigate conflicts of interest that could otherwise cause violations of those standards;
- Document and disclose the specific reasons that any rollover recommendations are in the retirement investor’s best interest; and
- Conduct an annual retrospective compliance review.
Investment adviser firms and investment adviser representatives that provide advice regarding IRA rollovers and/or other fiduciary advice to retirement plan sponsors, plan participants, or IRA owners must carefully review the conditions of PTE 2020-02 and implement policies and procedures to ensure compliance with the new exemption.
Sample Language & Forms Related to PTE 2020-02
RIA Compliance Consultants has developed and updated several resources for registered investment adviser firms to use when developing policies and procedures regarding IRA rollovers:
- Form ADV – Sample Language – Rollover Recommendation – Included with Bronze, Silver, Gold and Platinum Annual Packages
- WSP/CoE Section Update – IRA Rollover Recommendations – Included with Value, Bronze, Silver, Gold and Platinum Packages.
- Suitability – Retirement Plan Rollover – Client Acknowledgement – Included with Bronze, Silver, Gold and Platinum Packages.
- Conflicts of Interest – Checklist – Included with Bronze, Silver, Gold and Platinum Packages
RIA Compliance Consultants encourages investment adviser firms to closely review the DoL’s new guidance regarding IRA rollovers and PTE 2020-02 in light of their current compliance policies and procedures as well as the investment adviser’s actual practices. Likewise, an investment adviser firm should consult with an ERISA legal counsel regarding an investment adviser firm’s obligations under PTE 2020-02.
Updated Sample WSP/CoE Section – IRA Rollover Recommendations – May 5, 2021
Updated Sample Form – Suitability – Retirement Plan Rollover – Client Acknowledgement – May 5, 2021
OMB Approves Request for DoL Fiduciary Rule Delay – August 31, 2017
DoL Proposes Fiduciary Rule Delay – August 11, 2017
Department of Labor Fiduciary Rule – August FAQs – August 09, 2017
The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. It is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. For more information, please see our Disclosures webpage.
Posted by Bryan Hill
Labels: DOL, ERISA, Fiduciary, IRA Rollover