Rollovers, Regular Basis Focus of DOL Guidance

New DOL guidance on fiduciary investment advice provides important insights on the agency’s perspective on the new rule, particularly as it relates to rollover advice—and a reminder that other changes may well lie ahead.

The guidance, released April 13, relates to the department’s “Improving Investment Advice for Workers & Retirees” exemption and follows its Feb. 12, 2021 announcement that that exemption would go into effect as scheduled on Feb. 16, 2021. Of most immediate interest is likely the second of two documents—a set of compliance-focused frequently asked questions—with guidance for investment advice providers who are relying, or planning to rely, on the exemption. 

Rollover Roles

Significantly, the very first FAQ concludes by noting reference in PTE 2020-02’s preamble regarding when recommendations to roll over assets from an employee benefit plan to an IRA will be considered fiduciary investment advice. The DOL notes that not only are rollover recommendations are a “primary concern of the Department”—commenting that “financial services providers often have a strong economic incentive to recommend that retirement investors roll assets out of ERISA-protected plans into one of their institution’s IRAs”—but that “the decision to roll over assets from a plan to an IRA is often the single most important financial decision a plan participant makes, involving a lifetime of retirement savings.”

That said, the FAQ continues by reminding the reader that in that PTE, it “reiterated the conclusion it had reached in its 2016 rulemaking that the Deseret Letter, Advisory Opinion 2005-23A, was incorrect in its conclusion that the 1975 fiduciary rule did not extend to rollover advice,” and states clearly that “advice to roll assets out of a plan is advice as to the sale, withdrawal, or transfer of plan assets and, therefore, is covered as fiduciary advice to the extent that the other conditions of the 1975 fiduciary advice definition are satisfied.”

Deseret ‘Disavowed’

As for its previous interpretation related to those rollover recommendations, the guidance confirms that DOL will not pursue claims for breaches of fiduciary duty or prohibited transactions for the period between 2005 (when the Deseret Letter was issued) and Feb. 16, 2021, “or treat parties as violating the prohibited transaction rules, based on rollover recommendations that would have been considered non-fiduciary conduct under the reasoning of the Deseret Letter.” However, it also states quite clearly that this grace period has ended: “Having disavowed the Deseret Letter both in its 2016 rulemaking and its 2020 exemption, the Department does not believe additional extensions are warranted or protective of plan participants’ interests in sound advice.”

FAQ-7 speaks to the “regular basis” aspect of the five-part test, noting that “a single, discrete instance of advice to roll over assets from an employee benefit plan to an IRA would not meet the regular basis prong of the 1975 test.” However, the guidance goes on to point out that “advice to roll over plan assets can also occur as part of an ongoing relationship or as the beginning of an intended future ongoing relationship that an individual has with an investment advice provider,” and that when the investment advice provider has been giving advice to the individual about investing in, purchasing, or selling securities or other financial instruments through tax-advantaged retirement vehicles subject to ERISA or the Code, the advice to roll assets out of the employee benefit plan IS part of an ongoing advice relationship that satisfies the regular basis prong.

‘Regular’ Basics

Similarly, when the investment advice provider has not previously provided advice but expects to regularly make investment recommendations regarding the IRA as part of an ongoing relationship, the advice to roll assets out of an employee benefit plan into an IRA would be the start of an advice relationship that satisfies the regular basis requirement. Oh, and the guidance notes that the 1975 test extends to the entire advice relationship and does not exclude the first instance of advice, such as a recommendation to roll plan assets to an IRA, in an ongoing advice relationship.

While—as previously explained—PTE 2020-02 became effective on Feb. 16, FAQ-2 leaves no doubt that this is hardly the last word on the subject. While affirming that it “believes that core components of PTE 2020-02, including the Impartial Conduct Standards and the requirement for strong policies and procedures, are fundamental investor protections which should not be delayed while the Department considers additional protections or clarifications,” in FAQ-5, the DOL states that it is “reviewing issues of fact, law, and policy related to PTE 2020-02, and more generally, its regulation of fiduciary investment advice,” and that it “…anticipates taking further regulatory and sub-regulatory actions, as appropriate, including amending the investment advice fiduciary regulation, amending PTE 2020-02, and amending or revoking some of the other existing class exemptions available to investment advice fiduciaries.”

That said, the DOL goes on to clarify that those regulatory actions “will be preceded by notice and an opportunity for public comment.”

‘Fined’ Print?

FAQ-8 feels like a bit of a “set up,” asking what appears to be a loaded question: basically, could a fine-print disclaimer insulate an advice provider from fiduciary status even if other factors suggest that the advice would serve as a primary basis? Essentially, the guidance says such things can be considered, but that boilerplate disclaimers are insufficient to defeat the test—certainly when the parties have a mutual understanding that the adviser is making an individualized recommendation upon which the investor can be expected to rely in making the investment decision. Nonetheless, the DOL says that it “intends to consider the reasonable understandings of the parties based on the totality of the circumstances,” but that “firms and investment professionals cannot use written disclaimers to undermine reasonable investor understandings.”

FAQ-15 outlines the factors that financial institutions and investment professionals should “consider and document” in their disclosure of the reasons that a rollover recommendation is in a retirement investor’s best interest, including (but not limited to):

• the alternatives to a rollover, including leaving the money in the investor’s employer’s plan, if permitted;
• the fees and expenses associated with both the plan and the IRA;
• whether the employer pays for some or all of the plan’s administrative expenses; and
• the different levels of services and investments available under the plan and the IRA.

Other Items 

Other items addressed in the FAQs:

• The DOL’s definition of fiduciary investment advice (including a refresher on the five-part test) (FAQ-6)
• The requirements to comply with PTE 2020-02 (FAQ-10)
• The impartial conduct standards (FAQ-11)
• Why a written acknowledgement of fiduciary status is required (FAQ-13)
• What about conflicts of interest must be disclosed to retirement investors (FAQ-14)
• How financial institutions can meet the requirement to mitigate conflicts of interest (FAQ-16)
• Special considerations for financial institutions that use payout grids in implementing the exemption’s required policies and procedures (FAQ-17)
• How insurance industry financial institutions can comply with the exemption (FAQ-18)
• The annual retrospective review requirement designed to assist financial institutions in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and their policies and procedures—defined and explained (FAQ-19)
• How to correct violations (FAQ-20)
• How the DOL will enforce compliance (FAQ-21)

As noted above, the guidance is in the form of two documents. In addition to the one described above, the other, “Choosing the Right Person to Give You Investment Advice: Information for Investors in Retirement Plans and Individual Retirement Accounts,” includes questions a retirement investor can ask when interviewing potential advice providers, background information to help them understand the purpose of each question, and investor-focused frequently asked questions about the exemption.