DOL and Rollovers: A Long and Winding Road

Reprinted with permission from Market Solutions, Vol. 33, No. 3, September 2024. Market Solutions is a newsletter provided to its members by the Financial Markets Association.

DOL and Rollovers

There have been a lot of twists and turns in the Department of Labor’s efforts to define and regulate fiduciary investment advice provided to retirement investors, including rollover recommendations. So where are we now and how did we get here? What impact do recent federal court rulings have on broker-dealers’ and investment advisers’ requirements when it comes to making rollover recommendations?

History

Pre-PTE 2020-02

Prior to PTE 2020-02, whether advice to retirement investors was considered fiduciary investment advice was determined by the DOL’s five-part test. In interpreting the application of this test to rollovers, the DOL stated in Advisory Opinion 2005-23A that unless an individual was already acting as a plan fiduciary, they would not be considered to be providing fiduciary investment advice solely for recommending that a participant roll over his or her account balance to an individual retirement account (IRA). As such, “a person making such recommendations would not be a fiduciary solely on the basis of making such recommendations and would not engage in an act of self-dealing if he or she advises the participant to roll over his account balance from the plan to an IRA that will pay management or other investment fees to such person.”

Verdict – Most rollover recommendations are not fiduciary investment advice.

PTE 2020-02 – Initial

In 2020, the DOL issued PTE 2020-02. In FAQs released in conjunction with PTE 2020-02, the DOL stated the following:

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.

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. 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.

As a result, this FAQ had the effect of causing many recommendations to roll assets from an employer plan to an RIA to be considered fiduciary investment advice.

Verdict – Most rollover recommendations are fiduciary investment advice.

ASA Decision

In 2023, the United States District Court for the Middle District of Florida Tampa Division struck down the DOL’s guidance under FAQ 7 under PTE 2020-02. While leaving certain aspects of PTE 2020-02 intact, the court found that the policy under FAQ 7 “conflicted with the DOL’s existing regulations and as a result was an arbitrary and capricious” interpretation of ERISA.

Verdict – Most rollover recommendations are not fiduciary investment advice.

Retirement Security Rule and Amendments to PTEs

The DOL attempted to cure the court’s ruling by changing the 5-part test in its entirety. The new test defined fiduciary investment when the following factors are present:

• Directly or indirectly making professional investment recommendations to investors on a regular basis as part of its business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation:
  • is based on review of the retirement investor’s particular needs or individual circumstances,

• Reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and
  • may be relied upon by the retirement investor as intended to advance the retirement investor’s best interests; or
• The person making the recommendation represents or acknowledges that they are acting as a fiduciary.

Under this new definition, most rollover recommendations would be considered fiduciary investment advice, even if there wasn’t a preexisting advice relationship between the financial firm or professional making the recommendation and the retirement investor.

Verdict – Most rollover investment recommendations are fiduciary investment advice.

Recent Stays

Two Federal Courts in Texas stayed the new rule and the new definition. As a result, the previous five-part test still stands. As such, rollover recommendations would not be considered to be “on a regular basis” solely because “the advisor anticipates the recommendation is the first step in an ongoing financial relationship concerning tax qualified retirement assets (e.g., the rollover IRA)”.

For now, most broker/dealer and investment adviser rollover recommendations would not be fiduciary investment advice until and unless the DOL’s new definition stands and is implemented.

Verdict – ???

What Does This All Mean?

Given that the courts have stayed the new definition of fiduciary investment advice, broker-dealers and investment advisers are asking what they should do. One school of thought is to hold off implementing policies, procedures and practices to comply with amended PTE 2020-02. While understandable, that could be a mistake. Broker-dealers are still subject to the SEC’s Regulation Best Interest, and Investment Advisers are still subject to the ’40 Acts fiduciary standards.

The SEC’s Division of Trading and Markets issued a Staff Bulletin titled Standards of Conduct for Broker/dealers and Investment Advisers Account Recommendations for Retail Investors. In this Bulletin, the Division stated that “when making a rollover recommendation to a retail investor, broker/dealers and investment advisers must have a reasonable basis to believe both that the rollover itself and that the account being recommended are in the retail investor’s best interest.” The Division stated that when making such recommendations, factors that must be considered include the “costs, level of services available, features of the existing account, including costs, available investment options, ability to take penalty-free withdrawals, application of required minimum distributions, protection from creditors and legal judgments, and holdings of employer stock.” These factors are very closely aligned to the factors that must be considered when recommending rollovers under PTE 2020-02.

Additionally, the Division stated that, in their view, firms must “consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option”. They also stated that they believed a firm would need to “obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan” in order to conduct such an evaluation. Again, this is very similar to the rollover requirements under PTE 2020-02.

Conclusion

Therefore, while it may be tempting to hold off implementing policies and procedures for rollover recommendations under PTE 2020-02 until the dust settles on the legal challenges, it is critical that firms assess their compliance with the requirements under Reg BI and under the ’40 Act’s fiduciary obligations before making such a decision.

Achieving DOL and Rollover Compliance

Oyster Consulting has the regulatory compliance consultants you need to successfully navigate the DOL PTE 2020-02 requirements. Our experts have the knowledge and experience necessary to efficiently conduct your DOL PTE required assessment, testing and documentation. Our compliance consulting professionals can also help you prepare your procedures and assess available tools and vendors. Leverage our resources to ensure your review and compliance program will stand up to regulatory scrutiny.