As we just reach the end of summer, it might seem slightly masochistic to be thinking about Dec. 21. But it’s an important date for advisors who deal with client rollovers because the Department of Labor’s Field Assistance Bulletin 2018-02 is scheduled for withdrawal on Dec. 20. Barring any additional delays, that will be the final day of the DOL’s nonenforcement policy. Consequently, it’s prudent to review any required operational changes based on the nonenforcement policy’s assumed lapse. One step worth considering is to start planning for the upcoming rollover-analysis disclosure rules.
In April 2021, the DOL’s Employee Benefits Security Administration published New Fiduciary Advice Exemption: PTE 2020-02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions. The document reviews the prohibited transaction exemption’s background and “expressly covers prohibited transactions resulting from both rollover advice and advice on how to invest assets within a plan or IRA.”
Getting Into the Details
One requirement for financial institutions and investment professionals to use the exemption is to “document and disclose the specific reasons that any rollover recommendations are in the retirement investor’s best interest.” That sounds straightforward enough, and question No. 9 in the document’s FAQs gives more detail:
“Q9. Does PTE 2020-02 provide prohibited transaction relief for rollover recommendations?”
Yes. … “In addition to the other conditions, financial institutions must document and disclose in writing the specific reasons that a rollover recommendation is in the retirement investor’s best interest. In doing so, financial institutions should consider the retirement investor’s alternatives to a rollover, such as leaving the money in an employer’s plan and taking advantage of the investment options available in that plan, including available options other than those reflected in the retirement investor’s current plan holdings.”
From a high-level perspective, that guidance is relatively straightforward. But the remaining text in the response hints at a possible difficulty:
“Financial institutions and investment professionals are expected to make diligent and prudent efforts to obtain information about the existing employee benefit plan and the participant’s interests in it. See Q15 for more information on the factors to consider in connection with rollover recommendations.”
On to question 15:
“Q15. What factors should financial institutions and investment professionals consider and document in their disclosure of the reasons that a rollover recommendation is in a retirement investor’s best interest?”
Part of the response to question 15 is generic:
“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.”
That makes sense. If you don’t have detailed information about the client’s plan, how can you analyze it and advise objectively on rollovers involving the plan?
What’s a 404(a)(5)?
Potential compliance challenges ramp up further along in Q15’s response, however. In terms of getting the required information about the plan and the participant’s interest, the DOL suggests that “such information should be readily available as a result of Department regulations mandating disclosure of plan-related information to the plan's participants (see 29 CFR 2550.404a-5).”
Sounds easy enough. Just ask participants to get you their 404(a)(5) disclosure document along with their most recent account statement and you’re good to go. Of course, you’re more likely to get a blank stare than a document in response. One possible cause of confusion is that plans and record-keepers are likely to use a less intimidating name with their disclosure document, so it might take some effort to help participants identify and locate their plan’s information.
If the participant doesn’t have or won’t provide the information for some reason, the alternative step is to make a “reasonable estimation of expenses, asset values, risk, and returns based on publicly available information. The financial institution and investment professional should document and explain the assumptions used and their limitations.”
The DOL suggests that in cases where the 404(a)(5) document isn’t available, alternative data sources like the most recent Form 5500 or “reliable benchmarks on typical fees and expenses for the type and size of plan at issue” could be used. But in a recent “Inside the Beltway” webinar, Faegre Drinker partner Fred Reish pointed out that Form 5500 covers only large plans, typically those with 100-plus participants. Smaller plans file Form 5500-SF, which does not include the plan’s investment information.
The result is that compliance for rollovers is likely to become more time-consuming and difficult by year-end. If you haven’t been considering how you will collect the required plan information, this could be a good time to get started.
