PLANADVISER - May/June 2021 - 38

ERISA vista
Fred Reish and Joan Neri
Rollovers and Fiduciaries
Recent DOL guidance expands the definition of fiduciary advice
QUESTION: I'm an RIA [registered investment adviser] who
provides advisory services to individuals. If I recommend
that a client roll over plan monies to an IRA [individual
retirement account] that I manage, am I considered an
ERISA [Employee Retirement Income Security Act] fiduciary?
And, if so, what do I need to do, to comply with
ERISA fiduciary rules?
ANSWER: Yes. Under the Department of Labor (DOL)'s
expanded interpretation of fiduciary advice, you'll be considered
an ERISA fiduciary under these circumstances because
your rollover recommendation is the first step in providing
ongoing advice in the IRA. This means you will need to
satisfy ERISA's fiduciary standard of care. Also, in order to
avoid a prohibited transaction, you'll need to comply with
DOL Prohibited Transaction Exemption (PTE) 2020-02.
The DOL recently issued guidance expanding the scope
of the ERISA fiduciary advice definition, and this new interpretation
affects rollover recommendations even if you
have no pre-existing relationship with the plan or the plan
participant. By way of background, under the DOL fiduciary
advice definition, you're a fiduciary if you are: 1) providing
advice about investments for a fee, 2) on a regular basis, 3)
under a mutual understanding, 4) if that advice will form
a primary basis for the investment decision, and 5) if that
advice is individualized based upon the investor's particular
needs. If the advice or recommendations satisfy the fivepart
definition, the firm and the adviser are fiduciaries.
The DOL expanded its interpretation of the regular
basis component. Under its new interpretation, you are
providing advice on a regular basis: 1) if you have a preexisting
advice relationship with the participant on taxqualified
retirement assets-e.g., advising on another
IRA-or 2) if you anticipate that the rollover recommendation
is the first step in an ongoing financial relationship
concerning tax-qualified retirement assets-e.g., the rollover
IRA.
Here, you'll be a fiduciary under the five-part test with
respect to the rollover recommendation. You'll be receiving
a fee as a result of the advice-e.g., the advisory fee from
the IRA-under a mutual understanding with the participant
as evidenced by the IRA advisory agreement. The rollover
advice is the first step in an ongoing relationship as
the adviser to the IRA. And the advice is individualized for
that participant and is a primary basis for the rollover and
investing decisions.
As an ERISA fiduciary, you'll need to ensure that the
rollover advice satisfies the ERISA prudence standard and
duty of loyalty. You will also need to consider the prohibited
transaction rules. A prohibited transaction occurs because
you'll be receiving compensation that you wouldn't have
otherwise. This is self-dealing by a fiduciary, which is
prohibited by ERISA and the Internal Revenue Code (IRC).
Both ERISA and the IRC apply to rollover advice, but only
the IRC is relevant to advice for IRAs.
The good news is that you can rely on the PTE, which
became effective on February 16, to receive the IRA fee as long
as you satisfy the exemption's conditions. These demand:
* Compliance with a standard of care-i.e., the impartial
conduct standards-requiring: 1) satisfaction of a best
interest standard, which is identical to the ERISA duty of
prudence and loyalty; 2) reasonable compensation and
best execution; and 3) making no materially misleading
statements; and
* A disclosure to the participant explaining the specific
reasons why the rollover recommendation is in his
best interest, acknowledging your fiduciary status and
describing your services and any material conflicts of
interest.
Also, the PTE requires policies and procedures to
ensure compliance with the exemption's conditions. The
application of the policies must be reviewed annually, and
the review must be documented in a report that is certified
by a senior executive officer.
While the PTE is already effective, the DOL has issued,
with the IRS' agreement, a nonenforcement policy that
says the DOL will not pursue prohibited transaction claims
against investment advice fiduciaries so long as the advice
satisfies the impartial conduct standards. However, the
nonenforcement policy expires on December 20. But you'll
have until then to develop your policies and procedures
and disclosure documents. Stay tuned for more on this
topic in the July/August issue, where we'll discuss what the
DOL guidance says about the prudent process for rollover
recommendations.
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, where she focuses on all aspects
of ERISA compliance affecting registered investment advisers and
other plan service providers.
38 | planadviser.com May-June 2021 Art by Tim Bower
http://www.planadviser.com
PLANADVISER - May/June 2021

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