PLANADVISER - November/December 2020 - 38

ERISA vista
Fred Reish and Joan Neri
The DOL's Latest Proposed PTE
How advisers who only do rollovers would avoid prohibited transactions
QUESTION: I'm an RIA [registered investment adviser], and a
significant portion of my business results from 401(k) plan rollover
advice where I provide no advice or any other services
to the plan. I understand that, because the Department of
Labor [DOL] has expanded its interpretation of who qualifies
as a fiduciary investment adviser, this rollover advice could
result in a prohibited transaction. What steps would I need to
take to comply with the DOL's recent proposed exemption so
I can avoid a prohibited transaction?
ANSWER: The proposed exemption requires satisfaction of
a number of conditions, some of which mirror the conditions
of the best interest contract (BIC) exemption that was
part of the vacated fiduciary rule. However, there are some
new requirements that will necessitate changes to your
policies and procedures if the proposed exemption is finalized
as currently written.
In our previous column, we explained that, under the
DOL's new interpretation of " regular basis " under the fiduciary
advice five-part test, rollover advice will typically
result in a prohibited transaction, even if you have no
pre-existing financial advice relationship with the participant
(see " A Return to Rollover Advice, " PLANADVISER,
September-October 2020). You could then rely on the
proposed exemption, if it is finalized, to receive the otherwise
prohibited compensation-i.e., the individual retirement
account (IRA) advisory fee.
The proposed exemption consists of three principal
conditions: a standard of care-i.e., the " impartial conduct
standards " ; policies and procedures to ensure compliance
and an annual review obligation; and a disclosure obligation.
The impartial conduct standards would require: 1)
satisfying a best interest standard of care, which mirrors
the Employee Retirement Security Act (ERISA) prudence
standard and duty of loyalty; 2) receiving no more than
reasonable compensation; 3) making no materially
misleading statements; and 4) seeking best execution. If
you are currently an ERISA fiduciary to clients, you are
already subject to these standards. However, this standard
will be new if you become an ERISA fiduciary as a result of
the DOL's expanded interpretation of regular basis.
For rollover advice, in order to satisfy this standard,
you would need to consider all relevant factors, including
the plan investments and the investments available in the
proposed IRA; the different levels of services; and the fees
and expenses associated with both the existing plan and the
IRA, such as whether the employer pays for some of the plan's
expenses. You would then need to evaluate those factors to
determine whether recommending a rollover is appropriate
based on the participant's investment objectives, financial
circumstances and needs. We note that the Securities and
Exchange Commission (SEC)'s best interest standard would
require a similar process. (See " SEC's Position on Rollovers, "
PLANADVISER, November-December 2018).
Under the proposed exemption, you would also need to
document the specific reasons why the rollover recommendation
is in the participant's best interest.
Further, your policies and procedures would need to be
designed to ensure compliance with these standards and
to address mitigation of conflicts of interest. The proposed
exemption specifically requires that the firm mitigate
conflicts of interests by prudently designing policies and
procedures and incentive practices to avoid misalignment of
the firm's and its advisers' interests with those of the plan
participant. In addition, the firm would need to conduct a
retrospective review at least annually of its compliance with
these standards and to detect and prevent violations. This
review would need to be documented in a written report and
certified by the CEO or equivalent officer.
A written disclosure would need to be provided to the
participant prior to engaging in the IRA rollover. The disclosure
would need to affirm your fiduciary status and provide
a description of your services and of any conflicts of interest.
The proposed exemption also affords relief to advisers who
serve as fiduciaries.
At this point, we don't know whether the proposed exemption
will be adopted in its present form. Until the finalization,
an adviser can use a DOL and IRS nonenforcement policy
(Field Assistance Bulletin 2018-02) if the impartial conduct
standards are satisfied. Note that this policy does not protect
against private rights of actions under ERISA. That said,
for risk management purposes, advisers should consider
complying with the impartial conduct standards when
giving rollover advice, and they should review and update, as
needed, their policies and procedures to promote compliance.
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 November-December 2020
Art by Tim Bower
http://www.planadviser.com
PLANADVISER - November/December 2020

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