Tag Archive for: PTE 2020-02

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Failure to Fulfill PTE 2020-02’s Requirements

“When relying on PTE 2020-02 to provide investment advice for a fee, what are the penalties for failing to fulfill the requirements?” 

ERISA consultants at the Retirement Learning Center 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 Massachusetts is representative of a common inquiry regarding Prohibited Transaction Exemption (PTE) 2020-02.

Highlights of Discussion

PTE 2020-02 is the Department of Labor’s (DOL’s) newest PTE which, when followed, allows financial institutions and investment professionals to provide investment advice to retirement investors for a fee. Failure to comply with the PTE’s requirements could result in a variety of penalties, depending on the severity of the breach. Adopting the PTE is optional.

The most severe penalty is the imposition of a 10-year ineligibility period in the following scenarios.

  1. Financial institutions and investment professionals who are convicted of certain crimes arising out of their provision of investment advice to retirement investors will be ineligible to rely on the exemption for 10 years. “Crimes” are described in ERISA Sec. 411 (e.g., embezzlement, fraud, perjury, etc.). A financial institution with such a criminal conviction may submit a petition to the DOL to seek a determination that would allow it to continue to rely on the exemption. Petitions must be submitted to the DOL within 10 business days of the conviction.
  2. Financial institutions and investment professionals also will be ineligible to rely on the exemption for 10 years if they engage in systematic or intentional violations of the PTE’s conditions or provide materially misleading information to the DOL in relation to their conduct under the exemption. The DOL will first issue a warning and provide a six-month cure period. But without correction, the DOL will issue a written “ineligibility notice.”

Parties found to be ineligible to rely on PTE 2020-02 are permitted to rely on an otherwise available statutory exemption or administrative class exemption, or they can apply for an individual prohibited transaction exemption from the DOL.

With any misstep of the PTE’s requirements, the DOL has the right to transmit information to the IRS regarding the party’s violation of the prohibited transaction provisions of ERISA Sec. 406. IRC Sec. 4975 imposes a 15 percent tax on disqualified persons participating in prohibited transactions involving plans and IRAs.

Participants, beneficiaries, and fiduciaries with respect to plans covered under Title I of ERISA have a statutory cause of action under ERISA Sec. 502(a) for fiduciary breaches and prohibited transactions under Title I. The exemption, however, does not expand to IRA owners. ERISA Sec. 502(a) provides a cause of action for fiduciary breaches and prohibited transactions with respect to Title I Plans (but not IRAs) (see DOL FAQ #21).

Note the nonenforcement period that applies through June 30, 2022, for the rollover disclosure and documentation requirements of PTE 2020-02. (See an earlier Case of the Week for more details.)

Conclusion

Those who take advantage of the protections offered under PTE 2020-02 should be aware that failure to uphold the requirements could result in penalties and, potentially, loss of the PTE’s shield for a decade.

 

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DOL Enforcement Deadlines for PTE 2020-02

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

“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.

 

 

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The Line Between Education and Fiduciary Advice

Does the industry have a clear definition of what the Department of Labor (DOL) would consider investment education (not advice) in a 401(k) plan so that a financial advisor would not have to follow the requirements of Prohibited Transaction Exemption (PTE) 2020-02?

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 Minnesota is representative of a common question related to investment education.

Highlights of Recommendations

The DOL believes it provides a clear roadmap for determining when financial advisors are, and are not, investment advice fiduciaries under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC) in PTE 2020-02 and Interpretive Bulletin (IB) 96-1. 

“Oldie but goodie” DOL IB 96–1 identifies four categories (or “safe harbors”) of investment-related educational materials that advisors or others can provide to plan participants and beneficiaries without being considered to have provided fiduciary investment advice: 1) Plan information, 2) General Financial and Investment Information, 3) Asset Allocation Models and 4) Interactive Investment Materials.

Plan Information

Information about the benefits of plan participation, the benefits of increasing plan contributions, the impact of preretirement withdrawals on retirement income, the terms of the plan, the operation of the plan, or descriptions of investment alternatives under the plan would not constitute investment advice.

General Financial and Investment Information

General financial and investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax-deferred investment; historic differences in rates of return between different asset classes (e.g., equities, bonds, or cash) based on standard market indices; effects of inflation; estimating future retirement income needs; determining investment time horizons; and assessing risk tolerance would not constitute investment advice.

Asset Allocation Models

Examples would include pie charts, graphs, or case studies that provide a participant or beneficiary with asset allocation portfolios of hypothetical individuals with different time horizons and risk profiles.  Such models must satisfy the following requirements.

  1. The models must be based on generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over define periods of time.
  2. All material facts and assumptions on which such models are based (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) must accompany the models.
  3. To the extent that an asset allocation model identifies any specific investment alternative available under the plan, the model must be accompanied by a statement that
    • Indicates that other investment alternatives having similar risk and return characteristics may be available under the plan;
    • Identifies where information on those investment alternatives may be obtained; and
    • Discloses that, when applying particular asset allocation models to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and non-qualified plans) in addition to their interests in the plan.

Interactive Investment Materials

Examples in this category could include, but are not limited to, questionnaires, worksheets, software, and similar materials that provide a participant or beneficiary the means to estimate future retirement income needs and assess the impact of different asset allocations on retirement income.

Such materials must

  1. Be based on generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over defined periods of time;
  2. Contain an objective correlation between the asset allocations generated by the materials and the information and data supplied by the participant or beneficiary;
  3. Include all material facts and assumptions (e.g., retirement ages, life expectancies, income levels, financial resources, replacement income ratios, inflation rates, and rates of return) that may affect a participant’s or beneficiary’s assessment of the different asset allocations (Note: These facts and assumptions could be specified by the participant or beneficiary);
  4. (To the extent they include an asset allocation generated using any specific investment alternatives available under the plan), include a statement indicating other investment alternatives having similar risk and return characteristics may be available under the plan and where information on those investment alternatives may be obtained; and
  5. Take into account or are accompanied by a statement indicating that, in applying particular asset allocations to their individual situations, participants or beneficiaries should consider their other assets, income, and investments (e.g., equity in a home, IRA investments, savings accounts, and interests in other qualified and nonqualified plans) in addition to their interests in the plan.

While the provision of investment education is not a fiduciary act, the designation of a person or entity to provide investment educational services to plan participants and beneficiaries is a fiduciary act. Therefore, persons making this designation must act prudently and solely in the interest of the plan participants and beneficiaries.

Conclusion

The DOL provides examples of investment education in IB 96-1 that, when delivered, would not be considered investment advice, thereby helping the educator to avoid fiduciary liability for the information. However, the act of selecting the individual or entity to provide investment education to 401(k) plan participants and beneficiaries is a fiduciary act, subject to the standards of loyalty and prudence.

 

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