The Ultimate Guide to DOL Investment Advice Requirements

The long and winding road in defining fiduciary investment advice and the requirements of the prohibited transaction exemptions under ERISA continues. At the end of April of 2024, the Department of Labor (DOL) published its final Retirement Security Rule and amendments to Prohibited Transaction Exemption Guidelines 2020-02 and 84-24. Taken together, these requirements will shape how investment advisors, broker-dealers and insurance companies provide advice and sell investment products to retirement investors.

The most significant changes to earlier requirements are that the DOL redefined what type of activity would be deemed to constitute fiduciary investment advice, and also placed significant requirements on Independent Insurance Producers and Insurers who offer non-securities insurance products such as fixed annuities to retirement investors.

Compliance Deadlines

These rules go into effect on September 23, 2024; however, the DOL has allowed for a phased-in approach which only makes the Impartial Conduct Standards and Fiduciary Acknowledgement requirement effective on that date, while other aspects of the requirements go into effect by September 23, 2025.

New Definition of Fiduciary Investment Advice

Under the new definition, the DOL does away with its traditional five-part test for identifying when activity is considered fiduciary investment advice. That test is replaced by a broader test. First, a party would be considered to be an investment advice fiduciary when providing investment advice to a retirement investor if it directly or indirectly makes 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,
• the recommendation reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and
• the recommendation may be relied upon by the retirement investor as intended to advance the retirement investor’s best interests.

Alternatively, if a party making the recommendation represents or acknowledges that they are acting as a plan fiduciary, regardless of whether they meet the test above, they too would be considered an investment advice fiduciary. This definition would make most recommendations to roll assets out of an employer-sponsored plan to an IRA fiduciary investment advice.

PTE 2020-04 Overview

DOL PTE 2020-02 continues to set the conditions under which most investment advice fiduciaries may engage in or receive certain otherwise prohibited payments which create conflicts of interest when providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners. The conditions include:

• an impartial conduct standard
• specific disclosures requirements
• certain compliance requirements
• a requirement to conduct annual retrospective reviews.

Impartial Conduct Standards

The impartial conduct standards have four primary requirements. The amended PTE changed from requiring a “best interest” standard to requiring two specific duties: a duty of care and a duty of loyalty.

Duty of Care

The duty of care requires the investment advice fiduciary to demonstrate a specific level of care, skill, prudence, and diligence based on the investment objectives, risk tolerance, financial circumstances and needs of the retirement investor.

Duty of Loyalty

The duty of loyalty prohibits the investment advice fiduciary from placing the interest of any other party above those of the retirement investor.

The impartial conduct standard also prohibits the investment advice fiduciary from engaging in any communications that is materially misleading or that omits information when those omissions would cause the statement(s) to be misleading.

Additionally, the impartial conduct standard requires that all compensation, whether direct or indirect, related to fiduciary investment advice be reasonable and that the investment advice fiduciary seek to obtain best execution for investment transactions.

These impartial conduct standards are set to go into effect on September 23, 2024.

General Disclosure Requirements

Like the previous version of PTE 2020-02, the amendments require several types of disclosures. This includes the requirement that the investment advice fiduciary provide a written fiduciary acknowledgement as well as a statement of care and loyalty at, or before, the time of the recommendation. The DOL has provided model language that can be used for this purpose.

The DOL also requires that the investment advice fiduciary disclose all material facts relating to the scope and terms of the relationship, including conflicts of interest, material fees and costs, the types and scope of services, and any limitations. While many of these specific disclosures can be satisfied through other disclosures that are made (e.g., Form CRS, Form ADV, etc.), it is important to ensure that those disclosures include all of the necessary disclosures related to relationship with the retirement investor.

Rollover Disclosures

Finally, and likely most significant is the requirement that, when making a rollover recommendation from a plan that is covered by these requirements, investment advice fiduciaries must consider, document, and disclose to the retirement investor the bases for the rollover recommendation.

As with the earlier version of the PTE, factors that need to be considered include, but are not necessarily limited to:

• alternatives to the rollover, including leaving in the plan if available;
• fees and expenses associated with the plan and recommended investment or account;
• whether the employer or other party pays for some or all of the plan’s administrative expenses; and,
• the different levels of services and investments available under the plan and recommended account or investment.

The investment advice fiduciary must use actual plan information; however, if the retirement investor is unwilling or unable to provide the information, and after providing the retirement investor with a full explanation of the significance of the information, reasonable estimates of the expenses, asset values, risk and returns may be used based on publicly available benchmarking information of similar employer plans. In doing so, the investment advice fiduciary must document and explain assumptions used and their limitations.

Importantly, the DOL noted that an investment advice fiduciary will not violate the exemption if, acting in good faith and with reasonable diligence, an error or omission is made in the required disclosures so long as the disclosure is corrected as soon as practicable but no later than 30 days after the error is discovered.

Compliance Requirements

Investment advice fiduciaries must establish, maintain, and enforce written policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standard and other exemption conditions.

The policies and procedures must be reasonably designed to mitigate any conflicts of interest to the extent that a reasonable person would conclude that they do not create an incentive to place interests ahead of the retirement investor.

Financial institutions may not use quotas, appraisals, performance or other personnel actions, bonuses, contests, special awards, differential compensation, or other similar actions or incentives in a manner that is intended (or that a reasonable person would conclude are likely) to result in recommendations that do not meet the Care or Loyalty obligations.

Additionally, Financial Institutions are required to provide their complete policies and procedures to the DOL upon request within 30 days of request.

Retrospective Review Requirement

Like the earlier version of the PTE, Financial Institutions relying on the exemption must conduct a retrospective review at least annually. The retrospective review must be reasonably designed to detect and precent violations of and achieve compliance with the conditions of the exemption, including the impartial conduct standards and the policies and procedures governing compliance with the exemption.

The review must be reduced to a written report and include the methodology and results. The report must be provided to a Senior Executive Officer of the Financial Institution and that person must certify annually that they have reviewed the report, the Financial Institution has filed Form 5330 reporting any non-exempt prohibited transactions discovered, has corrected any such transactions, and has paid any resulting excise taxes.

In addition, the Executive Officer must certify that the Financial Institution has required written supervisory procedures and has a prudent process to modify policies and procedures as needed.

The review, report and certification must be completed within 6 months of the end of the period covered by the review and the report must be maintained for six years and must be made available to the DOL within 30 days of being requested.

Self-Correction

The amended PTE contains a self-correction component like the original PTE; however, notable changes were made. According to the amended PTE, a non-exempt prohibited transaction will not occur provided:

• either the violation did not result in harm, or the retirement investor is made whole for any harm;
• the Financial Institution corrects the violation; or
• the correction occurs no later than 90-days after learning of the violation or when the Institution reasonably should have learned of the violation.

Additionally, the Financial Institution must notify the person(s) responsible for the retrospective review during the applicable review cycle and the violation and correction must be specifically set forth in the written report for the period’s retrospective review.

PTE 84-24

PTE 84-24 lays out the exemption requirements related to purchases of insurance contracts, annuities, and securities issued by an investment company, as well as the payment of related commissions to insurance agents or brokers and certain other parties.

Investment advice fiduciaries, other than independent insurance producers (“Independent Producers”), must rely on the exemption requirements in PTE 2020-02.

For Independent Producers, PTE 84-24 lays out certain requirements similar to those in PTE 2020-02, but take into account the unique relationship between Independent Producers and the Insurance Companies whose products they sell (“Insurers”). Under PTE 84-24, where an Independent Producer provides fiduciary investment advice related to the sales of non-securities insurance products, the Insurer is not be considered to be an Investment Advice Fiduciary and does not have to provide the Fiduciary Acknowledgement.  However, the Insurer would have certain supervisory requirements over the Independent Producers related to the sales of their products.

Insurers must maintain written supervisory procedures related to the requirements of 84-24. The procedures must:

• require the Insurer to review each recommendation of the Insurer’s products made to retail investors by each Independent Producer and the review must be made without regard to the Insurer’s own interests;
• assess and mitigate conflicts of interest caused by incentives;
• prohibit certain types of incentives (e.g., quotas, contests, etc.); and,
• have a prudent process for determining whether to authorize an Independent Producer to sell the Insurer’s annuity products to retirement investors considering the items outlined above, and the assessment must be reviewed annually as part of the retrospective review.

Insurers utilizing Independent Producers must engage in an annual retrospective review. The Independent Producers are required to comply with Impartial Conduct Standards and disclosure requirements similar to those outlined in PTE 2020-02.

Importantly, Insurance Companies and Independent Producers should start preparing for their specific requirements as these will be significant changes with complicated implementations.

Partnering for DOL PTE Compliance Success

As noted above, the requirements above are set to go into effect in September of 2024, though certain aspects will have a delayed implementation until September 2025. While there are court challenges to these new requirements, firms should begin to prepare for complying with the requirements.

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.