PLANADVISER - March/April 2022 - 39

ERISA vista
Fred Reish and Joan Neri
Best Interest Reasons for a Rollover
PTE-2020-2 allows for circumstances that outweigh an IRA's costs
QUESTION: I'm a registered investment adviser who advises 401(k)
plan participants about distributions and plan rollovers. I know
that, under the Department of Labor's expanded interpretation,
a rollover recommendation to an individual retirement account
I manage is considered fiduciary advice, and I'll need to use
DOL Prohibited Transaction Exemption 2020-02 to avoid a
prohibited transaction. The PTE says I must determine that the
rollover
recommendation is in the participant's best interest.
What is considered a best interest reason for a rollover?
ANSWER: Although the DOL doesn't offer a list of acceptable
best interest reasons for a rollover, its guidance explains an
approach for determining a best interest reason. We have
some ideas as to what doing that may include.
The PTE requires that the rollover recommendation be in
the best interest of the plan participant, and, beginning July
1, the specific reason(s) why this rollover is thus must be
provided to the participant in writing before the rollover is
implemented. In determining the best interest reasons, you
need to evaluate five key components:
1) The participant's financial needs and investment
objectives. Under the PTE, the best interest standard requires
that the recommendation be " based on the investment objectives,
risk tolerance, financial circumstances and needs " of
the participant. In other words, the best interest process is
not a one-size-fits-all approach, but instead requires that you
assess what is important for satisfying that specific participant's
needs-e.g., active management, asset-allocation
services, periodic withdrawals, sustainable income, etc.
2) The participant's current plan investments, services
and fees. The plan investment and fee information is
available on the plan's 404a-5 disclosure, and the participant
should be able to obtain it from the plan's website or the
company's benefits office. In its FAQ, the DOL explains that,
if the participant fails to supply you this information, even
after you've explained its significance, and it's not otherwise
readily available, then you can make a reasonable estimation
of expenses, asset values, risk and returns; for that, you
will utilize publicly available information-e.g., Form 5500,
reliable benchmarks-and document the assumptions used
and their limitations. Obtaining the plan's summary plan
description is also helpful because it describes the plan
features and services, such as the availability of plan loans
and the withdrawal and distribution options.
3) Your managed IRA program. Your managed IRA
program, according to your fees and the investment
expenses, may cost more than the fees the participant pays
in the plan; however, costs are just part of the equation. In
its FAQ, the DOL explains that the different levels of services
and investments under the plan and IRA must be factored
in. That said, you should consider the array of investments
and services you offer.
4) Whether your managed IRA is in the participant's best
interest. The DOL explains that the alternatives to the rollover
should be considered, including leaving the participant's
retirement funds in the plan or taking a lump-sum distribution.
In comparing your managed IRA with the plan, you should be
guided by which alternative best aligns with the participant's
investment objectives, financial circumstances, risk tolerance
and needs. If the rollover IRA will be more expensive than the
plan is, your services may provide substantial additional value
to the participant that could offset the cost differential. The
key is to evaluate your services in light of that individual's
needs and circumstances.
5) The best-interest reasons. Once the first four steps
are completed, identify and document the specific reasons
that person's best interest will be served. Here are examples
that might apply to some participants:
* Your managed IRA offers financial and retirement
planning services otherwise unavailable under the plan,
and the participant needs those services.
* The participant lacks investment experience and will be
unable to devote time to management of his own investments
due to work demands. As a result, the participant would
benefit from active management of his IRA.
* The participant needs help in managing investments
in a manner that's consistent with withdrawing income at a
sustainable level, and you provide that service.
* The participant has a large plan account that would
benefit materially from an allocation to alternative or other
types of investments unavailable in the plan, which provide
reduced volatility or the potential for increased returns.
* You are already managing other accounts for the
participant, and she would benefit from an integrated
approach to managing those investments-e.g., tax-efficient
allocations to different accounts and/or overall portfolio
allocations where each account may be considered.
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.
Art by Tim Bower
planadviser.com March-April 2022 | 39
http://www.planadviser.com
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