Rollover Disclosure & Documentation Requirements to be Enforced Beginning July 1, 2022

While the majority of the Department of Labor’s new fiduciary rule, Prohibited Transaction Exemption 2020-02 (“PTE 2020-02), became enforceable on January 31st, some of the requirements pertaining to rollover recommendations are set to be enforced on July 1, 2022.

As detailed in this blog post, the DOL provided transition relief in its Field Assistance Bulletin, FAB 2021-02 by extending the enforcement date of PTE 2020-02 through January 31, 2022 for investment advice fiduciaries who are working diligently and in good faith to comply with the “Impartial Conduct Standards” for any transactions that are exempted under PTE 2020-02. These standards include a best interest standard, a reasonable compensation standard, and a requirement to avoid any materially misleading statements about the recommended transaction and other relevant matters.

PTE 2020-02 also requires investment advice fiduciaries to document the specific reasons any rollover recommendations from an employee benefit plan to another plan or an IRA, from an IRA to a plan, from an IRA to another IRA, or from one type of account to another is in the best interest of the retirement investor. PTE 2020-02 further requires this documentation to be provided to the retirement investor prior to engaging in the rollover. In FAB 2021-02, the DOL announced that it would not enforce the documentation and disclosure requirements for rollover recommendations under PTE 2020-02 through June 30, 2022.

The DOL has stated that for recommendations to rollover assets from an employee benefit plan to an IRA, relevant factors to consider and document would include (but are not limited to) the alternatives to the rollover, including leaving the money in the current plan if permitted and selecting different investment options, the fees and expenses associated with both options, whether the employer pays for some or all of the plan’s administrative expenses, and the different levels of services available under both options.

For rollovers from another IRA or from a commission-based account to a fee-based account, a prudent recommendation would include consideration of the services that will be provided under the new arrangement. As relevant, other factors to consider and document include the long-term impact of any increased costs and why the added benefits justify those costs, as well as the impact of features such as surrender schedules and index annuity cap and participation rates for insurance products.

Investment advice fiduciaries are expected to make diligent and prudent efforts to obtain the above information. In general, information regarding an existing plan should be readily available to the retirement investor because of the DOL’s regulations under ERISA § 404(a)(5) requiring disclosure of certain plan-related information to plan participants. If the retirement investor is not willing to provide the information and it is otherwise not available, investment advice fiduciaries can make a reasonable estimation of expenses, asset values, risk and returns based on publicly available information, such as the plan’s most recent Form 5500 or reliable benchmarks on typical fees and expenses for plans of a similar type and size. However, any assumptions and limitations should be documented and explained.

In delaying enforcement of these documentation and disclosure requirements until July 1, 2022, the DOL noted that many financial institutions are in the process of developing tools to comply with these requirements, and that they needed more time to build the required systems. Starting July 1st, investment advice fiduciaries will be expected to have this documentation for any rollover recommendations, and to have provided it to the retirement investor prior to the rollover. Investment advisers who engage in rollover recommendations should review their practices and ensure they have proper procedures in place for implementing compliance with these requirements by July 1st.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.

Contact Information