IRA Rollovers Exempt from Fiduciary Advice: DOL

If you are an investment advisor, a part of your firm’s advising plan and included as IRA rollover participants, you were advised to make themselves be familiar with recent guidance published by the Department of Labor (“DoL”) about the new trustee advice which prohibits transaction exemption.

IRA rollovers are already allowed to be offered as long as investment advisors do not violate Title I of ERISA (Employee Retirement Income Security Act of 1974) or IRC (Internal Revenue Code of 1986). This is in compliance with PTE 2020-02. This is to avoid conflicts of interest when investment advisers provide fiduciary investment advice exemption to IRA owners, plan participants, and plan sponsors, two codes that do not permit investment advisers compliance services.

Compared to the DoL’s previous clarification, adoption of PTE 2020-02 marks a change in the way investment advice exemption regarding IRA rollovers was defined and clarified. PTE 2020-02 of course follows several years of DoL guidance, court actions, and rulemaking.

These links take you to the U.S. Department of Labor’s “New Fiduciary Advice Exemption: PTE 2020-02 Improving Investment Advice for Workers & Retirees FAQs” and to the full text of PTE 2020-02.

PTE 2020-02’s Requirements

PTE 2020-02 requires investment advisers to explain their conflicts of interest in order to ensure that retirement investment advice is given in the best interest of investors, regardless of whether the adviser has a financial interest in the retirement plan. The DOL recognizes that conflict mitigation may be a better alternative for investment advisers than complete conflict elimination in certain situations.

As part of the new prohibited transaction exemption, investment advisers and other financial institutions are required to provide the following with their fiduciary advice exemption:

  • Upon becoming fiduciaries, acknowledge this fact in writing.
  • Clearly disclose all conflicts of interest related to their services,
  • Follow the Impartial Conduct Standards that require them to
  • Conduct research, evaluate investments, and provide advice the same way impartial and knowledgeable professionals do (i.e., must give prudent advice),
  • When making recommendations, one must have an absolute loyalty to the retirement investors (simply put, they cannot put their own sake before retirement investors’ or make the retirement investor’s interests lesser than their own),
  • Fees should be reasonable and must comply with federal securities laws regarding “best execution.”
  • When describing investments or other matters, don’t make misleading statements,
  • Policy and procedure should be implemented in a manner that ensures compliance with the Impartial Conduct Standards and reduces conflicts of interest that might otherwise violate them;
  • Any rollover recommendation must be documented and disclosed to the retirement investor with specific reasons;
  • Retrospectively review compliance annually.

If a retirement plan sponsor, plan participant, or IRA owner seeks advice regarding IRA rollovers or other fiduciary advice exemption, then investment adviser firms and investment adviser representatives must carefully review the conditions of PTE 2020-02 and implement policies to ensure compliance with the new exemption. 

Taking into account current compliance policies and procedures, as well as the actual practices of the investment adviser, MAH Advising advises investment advisor firms to closely review DoL’s new guidance regarding IRA rollovers and PTE 2020-02. Additionally, an investment adviser firm that has already been designated as an investment adviser firm is legally responsible for consulting with an ERISA legal counsel.

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