The US Department of Labor (DOL) recently issued guidance concerning a new exemption under the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) in connection with the provision of investment advice. PTE 2020-02, Improving Investment Advice for Workers & Retirees (the Exemption), became effective on February 16, 2021. On April 13, 2021, the DOL issued additional guidance, in FAQ format, to further explain the Exemption.
“Investment Advice Fiduciaries” are investment advisers, broker-dealers, banks and insurance companies and their employees, agents and representatives. The Exemption allows investment advice fiduciaries to receive compensation and to engage transactions that would otherwise violate the prohibited transaction provisions of ERISA and the Internal Revenue Code (the Code), so long as the requirements described below are met. The Exemption also provides the DOL’s interpretation of when advice to roll over retirement plan assets to an IRA—or between IRAs—is fiduciary investment advice.
It is important to note that the protections under the Exemption are in addition to the best interest, fiduciary and disclosure standards imposed by other regulatory bodies; these protections demand compliance with the Impartial Conduct Standards (the Standards). The Standards require that the investment advice be in the “best interest” of the plan participant. A definition of “best interest” is provided in the Exemption. The Standards also require that the compensation must be reasonable (as defined in ERISA section 408(b)(2) and Code section 4975(d)(2)); furthermore, the statements provided by the fiduciary regarding the advice must not be materially misleading.
The Exemption compels investment advice fiduciaries to:
Acknowledge their fiduciary status under ERISA and the Code, as applicable, in writing;
Provide written disclosures to retirement investors of the reasons the rollover recommendation is in their best interest; and
Maintain written documentation of the specific reasons that any recommendation to roll over assets from an ERISA plan to an IRA, from one IRA to another IRA or from one type of account to another (such as a commission-based account to a fee-based account) is in the best interest of the retirement investor.
The Exemption is a complex rule. Financial institutions and investment advice providers who rely on this rule to receive transaction-based and other variable compensation (or to engage in principal transactions) will want to carefully review how this rule affects their business and determine whether any changes should be made.