PLANADVISER - January/February 2022 - 38

ERISA vista
Fred Reish and Joan Neri
An Objectivity Lesson
The more objective the presentation, the less likely it will seem like advice
QUESTION: I'm a registered investment adviser
[RIA] who
provides investment education to Employee Retirement Income
Security Act [ERISA] plan participants about plan rollovers. The
participant then decides whether to roll over the funds to an
individual retirement account [IRA] I manage. Would I be
considered an ERISA fiduciary under the Department of Labor
[DOL]'s expanded interpretation of fiduciary advice, and will I
need to use the department's Prohibited Transaction Exemption
[PTE] 2020-02 in order to avoid a prohibited transaction?
ANSWER: It depends. If the information you supply to
participants is accurately presented in an objective manner
without an implied recommendation to roll their account
over to an IRA with you, then you are not providing fiduciary
advice for the rollover, and the PTE would be unnecessary.
However, if the information is tantamount to an implied
recommendation, then your advice does meet the ERISA
definition, and you'll need to use the PTE. For example, one
senior DOL official has said that presenting a participant
with an intended portfolio of investments for a rollover IRA
would be an implied recommendation.
The starting place for distinguishing between investment
advice and education is the DOL's Interpretive Bulletin
96-1. While that guidance applies to defined contribution
(DC) plans, it is informative for the IRA rollover scenario.
In the bulletin, the DOL identifies four categories of information
that do not constitute investment advice, namely:
1) plan information; 2) general
financial and retirement
information; 3) general information about asset-allocation
models; and 4) interactive investment materials. All of this
information must be presented in an objective manner.
For instance, the bulletin states that asset-allocation
models must be discussed as being portfolios for hypothetical
individuals with varying time horizons and risk
profiles based upon generally accepted investment theories
and accompanied by all material facts and assumptions. If
the model identifies any specific investment, then the materials
must include a statement that other funds with similar
risk and return characteristics may be available under the
plan and identify where information about those funds can
be obtained. The materials must also state that investors
should consider their other assets, income and investments
in determining whether to apply the model to their individual
situation.
Based on this guidance, if you give plan participants
objective comparisons of the advantages and disadvantages
of staying in a plan as compared with an IRA rollover, you'll
be providing investment education. On the other hand, if
you present a participant with a customized asset-allocation
portfolio for the IRA that includes specific investments such
as mutual funds, exchange-traded funds (ETFs), etc., there
is a risk that the DOL will view this as an implied rollover
recommendation outside the scope of investment education.
That's because, while DC plans offer a limited number of
investments selected by the plan sponsor, the same is not
true of IRAs, which have access to an almost unlimited
number of investments. If you mention any specific ones, it
suggests that you're recommending them for the IRA.
And, if the proposed IRA portfolio for a participant is
considered an implied rollover recommendation, you will
be providing fiduciary advice under the DOL's five-part
test: 1) providing advice about investments for a fee, 2) on
a regular basis (discussed below), 3) under a mutual understanding,
4) that the advice will form a primary basis for the
investment decisions-i.e., both selling the plan assets and
investing the rollover cash in the IRA-and 5) the advice is
individualized based upon the investor's particular needs.
Under the DOL's expanded interpretation, the regular
basis requirement will be met because the implied recommendation
to liquidate the investments in the participant's
plan account and to invest in the proposed portfolio in the
IRA are the initial steps in what is expected to be an ongoing
financial relationship in connection with the rollover IRA.
As you will be receiving an IRA advisory fee if your fiduciary
recommendation is accepted, you will have engaged in a
prohibited transaction and will need to satisfy the conditions
of the PTE for relief from it.
Incidentally, these same issues could arise in the context
of other rollovers. The DOL defines " rollover " broadly to
include one from a plan to an IRA, from a plan to a plan,
from an IRA to a plan or from an IRA to an IRA; also considered
rollovers are a change of account type for a plan or an
IRA-e.g., from commission-based to fee-based.
In sum, you should review your current investment
education practices to ensure that the information presented
to investors does not constitute an implied recommendation
to roll over account savings to an IRA with you.
Fred Reish is chairman of the financial services ERISA practice at
law firm Faegre Drinker Biddle & Reath LLP. Joan Neri, a nationally
recognized expert in employee benefits law, is counsel in the firm's
financial services ERISA practice.
38 | planadviser.com January-February 2022
Art by Tim Bower
http://www.planadviser.com
PLANADVISER - January/February 2022

Table of Contents for the Digital Edition of PLANADVISER - January/February 2022
