As of February 1, 2022, financial advisors who give advice to clients about whether to roll over 401(k) plan assets into an IRA are subject to a new set of regulations from the U.S. Department of Labor (DOL). Specifically, advisors who would receive increased compensation as a result of recommending a rollover (such as a commission or advisory fee) must qualify for an exemption from DOL’s prohibited transaction rules by complying with the new standards outlined by DOL.
In this guest post, Jaqueline Hummel, compliance consultant and Managing Director of Foreside, outlines the basics of DOL’s Prohibited Transaction Exemption 2020-02 (PTE 2020-02), details the six key conditions required of financial advisors by PTE 2020-02, and provides tips for advisory firms to comply with the new rules.
At a basic level, PTE 2020-02 expands the definition of a “prohibited transaction” under ERISA to include any recommendation for rolling over 401(k) assets into an IRA (or from one IRA to another) when doing so would increase the compensation for the advisor. To qualify for an exemption to this rule, advisors must comply with six key conditions:
- Acknowledge that they are fiduciaries under ERISA;
- Disclose, in writing, to the client the scope of the relationship and any material conflicts of interest;
- Comply with DOL’s Impartial Conduct Standards requiring advisors to provide prudent investment advice, charge only reasonable compensation, and avoid misleading statements;
- Provide written disclosures to clients of why the recommendation to roll over assets is in their best interests;
- Conduct an annual review of the firm’s compliance with PTE 2020-02 (and document the results in a written report to a “Senior Executive Officer” of the financial institution); and
- Adopt and implement policies and procedures to comply with the DOL’s Impartial Conduct Standards, mitigate conflicts of interest, and document the reasons for recommending rollovers of retirement assets
While many advisors may already be following some of these conditions (for example, RIAs who have fiduciary status by virtue of the SEC’s fiduciary rule may already acknowledge that status in writing and provide disclosures of material conflicts of interest in Form ADV), DOL has its own specific requirements, including model language to use in disclosure documents, that are required to comply with the prohibited transaction exemption. Nevertheless, RIAs may be able to easily adapt their existing disclosure documents, such as Forms ADV and CRS, to satisfy the first two requirements.
Even though it may seem daunting when viewed in its entirety, compliance with PTE 2020-02 can be more manageable by breaking it down into its individual components and determining where the advisor’s existing processes and tools can be used or adapted. Connecting with other advisors or hiring an expert to walk through the steps of developing policies and procedures can also relieve some of the burden on RIAs to build up their own compliance standards from scratch.
Ultimately, with the deadline to meet DOL’s documentation and disclosure requirements approaching on June 30, 2022, the most important thing is for advisors to be proactive about putting their firm’s standards in place (which might need to be adjusted as DOL releases more guidance in the future). Read More…