New Enforcement Date for DOL Rollover Recommendations: Documenting and Meeting the DOL’s Prohibited Transaction Exemption

November 2, 2021

WHAT HAPPENED?

The recent Department of Labor Field Assistance Bulletin 2021-02 provides that from December 21, 2021, through January 31, 2022, the DOL will not pursue prohibited transaction claims against firms who are working diligently, and in good faith, to comply with the Impartial Conduct Standards for transactions exempted by the Prohibited Transaction Exemption 2020-02 (PTE).

In addition, the specific documentation and disclosure requirements for rollovers in PTE 2020-02 will not be enforced by the DOL through June 30, 2022.

However, all other requirements of the exemption will be subject to full enforcement on February 1, 2022.

Almost a year ago, the U.S. Department of Labor (DOL) announced a new interpretation of fiduciary status and an exemption from prohibited transactions under ERISA, the Prohibited Transaction Exemption 2020-02 (see our prior coverage here). The interpretation of fiduciary status now includes advice given by investment professionals to ERISA plan participants and IRA owners, which includes non-discretionary rollover recommendations.  The bad news: under ERISA, investment advisers and broker-dealers who have this fiduciary status are prohibited from receiving increased compensation as a result of their investment advice.  The good news: if you meet the requirements of PTE, or other existing exemptions under ERISA, the rollover recommendation will not be prohibited. Therefore, firms will need to qualify for an exemption when they recommend rollovers.

When did the Exemption Become Effective?

The exemption became effective on February 16, 2021, and initially the DOL provided transitional relief through December 20, 2021, which relieved fiduciaries of the obligation to comply fully with many of the exemption’s conditions during that period.

The DOL recently identified challenges for firms including the costs of distributing disclosures outside of regular distribution cycles, the significant burden of implementing rollover documentation and disclosure requirements in a systematic manner, and the difficulties of aligning the required retrospective review on a calendar-year basis with the December 20, 2021, expiration date.  In light of these challenges the DOL understood that firms would need more time to comply.

Ali Khawar, Acting Assistant Secretary of Labor for Employee Benefits Security, said that “[b]ased on concerns raised, we’ve concluded that providing additional transition relief for financial institutions that are working in good faith to build systems to comply with the exemption conditions is appropriate.”

What are the requirements of PTE, and when will they be enforced?
The Prohibited Transaction Exemption 2020-02 (PTE) for non-discretionary rollover recommendations has the following requirements and enforcement dates:
The Impartial Conduct Standards Requirement:  The Impartial Conduct Standards must be met (i.e., best interest, reasonable compensation, and without misleading statements) – good faith effort must be made to comply with these currently.
Written Policies and Procedures Requirement:  Firms must establish written policies and procedures to ensure compliance with the Impartial Conduct Standards and to mitigate conflicts, especially around compensation, so that the interests of the retirement investor come before those of the firm – these must be in place by February 1, 2022.
Retrospective Review Requirement:  An annual retrospective review of compliance to the PTE requirements, documented in a written report signed by an officer of the firm – recordkeeping for this review should begin January 1, 2022, to allow for review on a calendar-year basis.
Disclosure and Documentation Requirements:  While the requirements above must all be met by February 1, 2022, the DOL is giving firms until June 30, 2022, to comply with the following disclosure and documentation requirements:

• A written acknowledgement of fiduciary status – prepare now for the June 30, 2022, deadline
• A written disclosure of the scope of relationship and all material conflicts of interest (similar to the requirement under Regulation Best Interest) – existing disclosures such as Form CRS can help here, but review and prepare any needed disclosures for the June 30, 2022, deadline
• For rollover recommendations, written documentation of the specific reasons the rollover is in the best interest of the retirement investor (here a rollover is broadly defined to include Plan to IRA, IRA to IRA and transfers from one type of account to another, such as from a fee-based to a commission based account) – prepare now for the June 30, 2022, deadline

The PTE requirements for documentation and an annual review are burdensome, especially when the documentation of a rollover recommendation must be specific to the circumstances of the individual retirement investor. The DOL stated in their April FAQ on the PTE that firms must consider and document their prudent analysis of why a rollover recommendation is in a retirement investor’s best interest. For recommendations to roll over assets from an employee benefit plan to an IRA, the relevant factors include but are not limited to:

• the alternatives to a rollover, including leaving the money in the investor’s employer’s plan, if permitted;
• the fees and expenses associated with both the plan and the IRA;
  whether the employer pays for some or all of the plan’s administrative expenses; and
  the different levels of services and investments available under the plan and the IRA.
• whether the employer pays for some or all of the plan’s administrative expenses; and
• the different levels of services and investments available under the plan and the IRA.

To satisfy the documentation requirement for rollovers from an employee benefit plan to an IRA, firms should make diligent and prudent efforts to obtain information about the existing employee benefit plan and the participant’s interests in it. To be ready, firms need to create documents, systems and training for investment professionals that may recommend non-discretionary rollovers.

WHAT DOES THIS MEAN FOR ME?

While all existing ERISA exemptions are still available, this may be the first time many firms have had fiduciary status under ERISA.  If no other exemptions apply, now is the time to prepare for PTE requirements.  Developing your approach to this issue, the required written documentation and the necessary training for investment professionals, will take time and effort. Start now to take advantage of this extended compliance period before time runs out.

The shift away from requiring that investments only be suitable, and toward enacting a higher standard of fiduciary duty, will likely continue among regulatory bodies in the coming years.  If you need assistance or guidance in complying with these provisions, Fairview can help. Contact us today for more information about the DOL’s fiduciary requirements and ERISA guidelines.