Tag Archive for: advice

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DOL Enforcement Deadlines for PTE 2020-02

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An advisor asked: “I’m confused by the compliance deadlines for various provisions of Prohibited Transaction Exemption (PTE) 2020-02 related to providing investment advice to retirement investors.  Can you summarize the enforcement deadlines, please?”

Highlights of Discussion

Absolutely; financial professionals and institutions that seek to comply with PTE 2020-02 must satisfy the following six steps by the dates indicated.

PTE 2020-02 Requirements DOL Enforcement Begins
1. Provide advice in accordance with the three “Impartial Conduct Standards,” which mandate that advice be given

·         In the best interest of the retirement investor,

·         At a reasonable price,

·         Without any misleading statements.

 

 After January 31, 2022

 

Originally effective February 16, 2021, the DOL implemented a “nonenforcement policy” under DOL FAB 2018-02 Field Assistance Bulletin (FAB) 2018-02 until December 20, 2021, for those who diligently and in good faith complied with the Impartial Conduct Standards. FAB 2021-02  further extended the nonenforcement policy through January 31, 2022.

 
2. Acknowledge in writing their fiduciary status under ERISA and the Internal Revenue Code;

3. Describe in writing the services to be provided and any material conflicts of interest that may exist;

4. Adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and that mitigate conflicts of interest;

5.     Conduct an annual retrospective review of their compliance with the requirements and produce a written report that is certified by one of the financial institution’s senior executive officers;

 After January 31, 2022

 

Pursuant to FAB 2021-02, the DOL will not pursue cases against advisors and institutions utilizing PTE 2020-02, provided they make a good faith effort to follow the three Impartial Conduct Standards (see #1 above)
6. FOR ROLLOVERS:  If the advice involves a rollover recommendation, then

 

• Document the reasons that a rollover recommendation is in the best interest of the retirement investor; and

 

• Disclose the justification for the rollover in writing to the retirement investor.

 After June 30, 2022

 

Pursuant to FAB 2021-02, the DOL will not enforce the rollover documentation and disclosure requirements of PTE through June 30, 2022.

Conclusion

Financial professionals and organizations that seek relief under PTE 2020-02 should take note of the different enforcement deadlines that apply as a result of FAB 2021-02.

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Five-Part Test Involves Reasonable Understanding

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“Can you give me real-world insight into the five-part test the Department of Labor (DOL) will apply for determining whether an advisor or firm is giving fiduciary investment “advice?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in North Carolina is representative of a common question on what constitutes investment advice.

Highlights of the Discussion

To determine whether investment guidance rises to the fiduciary level of investment advice, the DOL and IRS will apply the following five-part test (see PTE 2020-02  and IRS FAQs on PTE 2020-02. If the answer is “yes” to all five of the following test questions, and the advisor receives payment for the advice, he or she is an investment advice fiduciary, and would have to follow a prohibited transaction exemption (PTE) (e.g., PTE 2020-02) to receive payment for the advice.

Five-Part Test Questions

Consideration:  Authorities will consider written statements disclaiming any element of the five-part test but the disclaimers will not in and of themselves be determinative of fiduciary status. Firms and investment professionals cannot use written disclaimers to undermine reasonable investor understandings.

 Yes No
1.    Will the advisor render advice to the plan, plan fiduciary, or IRA owner as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property? 

 

Consideration:  Advice could include a recommendation to an investor to conduct a rollover. A recommendation to roll assets out of a retirement plan is advice with respect to moneys or other property of the plan and, if provided by a person who satisfies all of the requirements of the five-part test, constitutes fiduciary investment advice.
2. Will the advice be given on a regular basis?

Considerations:  Whether advice to rollover assets from a workplace retirement plan to an IRA constitutes advice “on a regular basis” depends on whether the advice

·         Is a single, discrete instance;

·         Occurs as part of an ongoing relationship; or

·         Occurs at the beginning of an intended future ongoing relationship that an individual has with an investment advice provider.
3. Is the advice given pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner?

Consideration:  When making a determination on this question, the DOL intends to consider the reasonable understandings of the parties based on the totality of the circumstances.
4.  Will the advice serve as a primary basis for investment decisions with respect to plan or IRA assets? 

Consideration:  The recommendation need only be “a” primary basis for investment decisions—not necessarily “the” primary basis for investment decisions—before it would deem to satisfy this prong of the five-part test.  If the parties reasonably understand that the advice is important to the investor and could affect the investor’s decision, that is enough to satisfy the primary basis requirement.
5.  Will the advice be individualized based on the particular needs of the plan or IRA?

Consideration: Put another way, is the advisor making an individualized recommendation to an investor upon which he or she will rely on to make an investment decision? Here again, the DOL will look at the reasonable understandings of the parties based on the totality of the circumstances.

 

Conclusion

Although the DOL’s five-part test for fiduciary investment advice may seem straightforward, there are important subtleties that come into play.  The DOL will consider the reasonable understandings of the parties based on the totality of the circumstances.

 

 

© Copyright 2024 Retirement Learning Center, all rights reserved