PLANADVISER - September/October 2022 - 39

ERISA vista
Fred Reish and Joan Neri
Rollover Rules for 457(b) Plans
The SEC steps in where ERISA didn't tread
QUESTION: I'm a registered investment adviser who
provides investment advisory services to participants in
retirement plans, including government plans. Occasionally,
I recommend that a plan participant in a 457(b) plan roll
over his or her account to an individual retirement account
I will manage. Is this considered fiduciary advice under
the Employee Retirement Income Security Act and/or the
Internal Revenue Code and therefore requiring compliance
with Department of Labor Prohibited Transaction Exemption
2020-02 in order to avoid a prohibited transaction? If
not, are there other fiduciary rules that apply?
ANSWER: The ERISA fiduciary standard along with the
prohibited transaction rules of ERISA and the IRC do not apply
to government plans, and, therefore, PTE 2020-02 relief isn't
needed, in the case of, for example, a rollover recommendation.
But, under the Securities and Exchange Commission's
Interpretation Regarding Standard of Conduct for Investment
Advisers, a rollover recommendation-including one
involving a 457(b) plan account-is subject to the SEC's best
interest standard. And the SEC best interest standard and
the DOL best interest standard have many similarities.
The ERISA fiduciary definition and duties of prudence and
loyalty do not apply to government plans, including government
tax-qualified plans-e.g., 401(a) pension plans, 403(b)
plans for public schools and universities, and 457(b) plans.
However, the SEC's rules must also be considered. Under
its above-mentioned interpretation, a rollover recommendation
is subject to the SEC's best interest standard of care. The
commission's recent Staff Bulletin: Standards of Conduct for
Broker/Dealers and Investment Advisers Account Recommendations
for Retail Investors provides additional details
about compliance with this standard including its similarity
to the Reg BI standard. As explained in the bulletin,
the adviser interpretation best interest standard and the Reg
BI standard " generally yield substantially similar results in
terms of the ultimate responsibilities owed to retail investors. "
Also, like the DOL did, the SEC applies the term " rollover "
broadly to include recommendations for retirement
account rollovers and IRA-to-IRA transfers.
In the Staff Bulletin, the staff explain that, in making a
best interest rollover recommendation, all relevant factors
must be considered in light of the retail investor's investment
profile, including " costs; level of services available; features
of the existing account, including costs; available investment
options; ability to take penalty-free withdrawals; application
of required minimum distributions; protection from creditors
and legal judgments; and holdings of employer stock. "
These factors are similar to those enumerated by the DOL
in its guidance. For instance, both agencies emphasize the
importance of evaluating and comparing the costs and the
services in the retail investor's current plan or account and in
the potential account-e.g., the rollover IRA. In the Adopting
Release to Reg BI, the SEC made clear that a generic reason
such as the IRA offering more investment choices would
be insufficient to justify a rollover recommendation where
the additional investments would not be needed or used.
However, where the services in the new account are valuable
to the investor as based on his investment profile, then those
services could justify a rollover recommendation.
Further, like the DOL, the SEC staff guidance says that
all of the retail investor's options need to be considered and
evaluated as part of the best interest process. The individual's
options include leaving the money in his current plan;
taking a taxable distribution; rolling the money over to the
potential IRA; and, if the investor is switching jobs, rolling
the money into his new employer's plan.
One difference between the DOL best interest process
under PTE 2020-02 and the SEC best interest process is that
the PTE requires that participants be given written disclosures
of the " specific reasons " why the rollover recommendation
is in their best interest. Although the SEC has no similar
requirement, there's a reasonable expectation that its examiners
will ask for that documentation. Also, a fair reading
of the Staff Bulletin is that an adviser would have specific
reasons about why a rollover recommendation is in the best
interest of a retirement plan investor, even if those reasons
don't have to be reduced to writing. Even there, though, a
written record is evidence of compliance.
In conclusion, although neither ERISA's nor the IRC's
prohibited transaction rules apply to government plans,
and therefore the PTE's relief is not needed, the SEC regulates
rollover recommendations of both private-sector and
government plans in a similar manner. To satisfy the SEC's
best interest standard, you should consider using a process
similar to that required under the PTE.
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.
planadviser.com September-October 2022 | 39
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PLANADVISER - September/October 2022

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