Preparing for retirement is one of the most impactful goals you’ll ever help your clients achieve. And as part of that preparation, it’s likely you provide ongoing guidance regarding their retirement savings accounts including 401(k)s, 403(b)s and IRAs. But as part of a recent ruling by the Department of Labor (DOL), you may need to adjust your process regarding retirement account rollover advice.
The DOL’s PTE 2020-02, known as “Improving Investment Advice for Workers & Retirees,” set new requirements for registered investment advisers (RIA) and broker-dealers who provide recommendations to employer-sponsored retirement plan participants. Here’s what you need to know to stay compliant.
Who is subject to the new DOL fiduciary exemption?
Any financial professional, such as an RIA or broker-dealer, who earns commissions or flat fees from recommending a rollover to a client must abide by PTE 2020-02. Failing to do so may result in hefty penalties and loss of compensation.
What does the DOL’s New Fiduciary Advice Exemption (PTE 2020-02) say?
According to the DOL themselves, PTE 2020-02 is a, “new prohibited transaction exemption under ERISA and the Code for investment advice fiduciaries with respect to employee benefit plans and individual retirement accounts (IRAs). Investment advice fiduciaries who rely on the exemption must render advice that is in their plan and IRA customers’ best interest in order to receive compensation that would otherwise be prohibited in the absence of an exemption, including commissions, 12b-1 fees, revenue sharing, and mark-ups and mark-downs in certain principal transactions. The exemption expressly covers prohibited transactions resulting from both rollover advice and advice on how to invest assets within a plan or IRA.”
PTE 2020-02 enacted some changes to the five-part fiduciary test. Amongst these changes, the DOL stated advisers may be committing an Employee Retirement Income Security Act of 1974 (ERISA) violation if they make recommendations regarding rolling over funds from a 401(k) to an IRA.
If a financial professional does recommend a rollover and receives additional compensation for it, they must file an exemption under this new ruling.
What are the qualifications for exemption under PTE 2020-02?
There are a few requirements advisers must meet in order to be considered exempt. To meet these requirements an adviser must:
- Disclose their fiduciary status.
- Provide a written scope of practice, including any conflicts of interest.
- Remain compliant with the Impartial Conduct Standards.
- Provide written reasoning as to why a rollover is in the client’s best interest.
- Provide specific documentation for reasoning behind a recommendation to rollover assets from one account type to another.
What is the purpose of DOL PTE 2020-02?
The new Fiduciary Advice Exemption establishes new guidelines for financial professionals who advise clients on their retirement planning options. If an RIA or broker-dealer advises a client to roll funds from a 401(k) into a Roth IRA and they earn money on the transaction, that needs to be disclosed to the client as a potential conflict of interest.
Financial professionals can disclose potential fees or conflicts of interest by providing clients with disclosures in a timely manner. For fees associated with rollovers or new retirement accounts, this would require a 404(a)(5) disclosure.
What is in a 404(a)(5) Disclosure?
The Department of Labor requires retirement plan providers to give participants comprehensive information regarding potential investment fees in a timely manner.
To stay compliant, plan providers should give participants access to a 404(a)(5) fee disclosure. This disclosure should identify all relevant fees the participant may be subject to, including recordkeeping or custodial fees.
Different types of fee disclosures include:
- New participant fee disclosure.
- Initial investment disclosure notification.
- Fee change disclosure.
- Quarterly fee disclosure.
A 404(a)(5) disclosure can be sent electronically if the participant meets one of the following requirements:
- They have access to the disclosure on a work computer.
- They are given a work computer.
- They opt-in to receive plan documents electronically.
A hard copy of the disclosure can also be sent in the mail.
Staying compliant with the DOL
Like most new compliance updates, DOL PTE 2020-02 has required an analysis of and adjustment to the status quo for financial advisers. A task which often comes with its own set of challenges. As part of the COMPLY portfolio of firms, NRS and its fellow COMPLY firm RIA in a Box, provides investment advisers and broker-dealers with cutting edge solutions to core compliance challenges, including the DOL’s new Fiduciary Advice Exemption: PTE 2020-02.
RIA in a Box’s RolloverAnalyzer provides advisers with an intuitive digital solution to assess, document and disclose rollover recommendations and meet compliance requirements in a single process. Learn more about the RolloverAnlayzer solution and how the COMPLY portfolio helps compliance professionals set a new standard for compliance excellence.