DOL Guidance Focuses on 401(k)-to-IRA Rollover Advice

Investment advisors who encourage employees to roll over their 401(k) savings into an individual retirement account (IRA) must adhere to the "investor's best interest" fiduciary standard, and do so from the first conversations about rolling over fund assets—if the advisor expects to establish an ongoing relationship with the plan participant—according to new guidance issued by the U.S. Department of Labor (DOL) on April 13.

Employers, as plan sponsors, should ensure that any investment advisors they work with to provide plan participants with advice, including advisors at financial services firms that act as plan record keepers and administrators, adhere to the new requirements.

A Controversial Rule

The DOL's Employee Benefits Security Administration allowed a controversial Trump administration final rule on providing investment advice to retirement plan participants to take effect as scheduled on Feb. 16.

That regulation, Prohibited Transaction Exemption (PTE) 2020-02—Improving Investment Advice for Workers & Retirees, exempts investment advisors from certain prohibitions under the Employee Retirement Income Security Act (ERISA)—including the prohibition against receiving compensation from third parties in connection with transactions involving employer-sponsored retirement plans and IRAs—as long as certain practices are followed to ensure that any advice given to plan participants is in the participants' best interests.

To receive the exemption, an investment professional or financial institution, among other requirements, must abide by the impartial conduct standards. Investment-advice fiduciaries who meet those standards could receive "a wide variety of payments [from mutual fund companies and investment firms] that would otherwise violate the prohibited transaction rules," according to the final rule.

Allowing fiduciary advisors to receive compensation directly from mutual fund companies, albeit with certain restrictions, means participants don't pay out of their own pocket for advice, which might otherwise be unaffordable for them, supporters of the rule said. Critics contended that allowing third-party payments to advisors raised concerns about participants receiving conflicted advice.

Two New Documents

The new, follow-up guidance consists of two documents:

• Choosing the Right Person to Give You Investment Advice: Information for Investors in Retirement Plans and Individual Retirement Accounts, which includes questions retirement investors can ask when interviewing potential advice providers and background information to help them understand the purpose of each question.
  

• A set of frequently asked questions (FAQs) for investment advice providers who are relying, or planning to rely, on the exemption.

The DOL is continuing to review issues of fact, law and policy related to the exemption, and more generally, its regulation of fiduciary investment advice, said Acting Assistant Secretary of Labor for Employee Benefits Security Ali Khawar.

Fiduciary Advice and Plan Rollovers

Retirement plan rollovers were historically treated as a one-time, nonfiduciary service. However, that was changed under the prohibited transaction exemption rule, as the new guidance makes clear.

In the first FAQ, the DOL recognizes that "financial services providers often have a strong economic incentive to recommend that retirement investors roll assets out of ERISA-protected plans into one of their institution's IRAs" and that "the decision to roll over assets from a plan to an IRA is often the single most important financial decision a plan participant makes, involving a lifetime of retirement savings."

However, Khawar said that the exemption "allows for important investor protections, including a stringent 'best interest' standard of care for fiduciary recommendations of rollovers from ERISA-protected retirement accounts."

FAQ-1, for instance, states that "advice to roll assets out of a plan is advice as to the sale, withdrawal, or transfer of plan assets and, therefore, is covered as fiduciary advice to the extent that the other conditions of the 1975 fiduciary advice definition [under ERISA] are satisfied."

FAQ-7 also addresses rollover issues. "A single, discrete instance of advice to roll over assets from an employee benefit plan to an IRA" would not meet the requirement that advice be provided on a regular basis to establish a fiduciary relationship with an advisor, the FAQ states. However, "when the investment advice provider has been giving advice to the individual about investing …  through tax-advantaged retirement vehicles subject to ERISA or the [Internal Revenue] Code, the advice to roll assets out of the employee benefit plan is part of an ongoing advice relationship that satisfies the regular basis prong," under which advice must be in a participant's best interest. 

The FAQ continues, "Similarly, when the investment advice provider has not previously provided advice but expects to regularly make investment recommendations regarding the IRA as part of an ongoing relationship, the advice to roll assets out of an employee benefit plan into an IRA would be the start of an advice relationship that satisfies the regular basis requirement."

Nevin Adams, chief content officer and head of research for the American Retirement Association and its subsidiary, the National Association of Plan Advisors, blogged that the new guidance states clearly that best-interest fiduciary standard "tends to the entire advice relationship and does not exclude the first instance of advice, such as a recommendation to roll plan assets to an IRA, in an ongoing advice relationship."

"All in all," he concluded, the new guidance "may not be much different from what was previously shared/discussed in the preamble [to the prohibited transaction exemption rule]—but most will find this positioning a lot easier to digest."

What's Next

The rule will, in many cases, "make…call center operators affiliated with financial institutions 'advice fiduciaries,' " when discussing 401(k) account rollovers, according to retirement plan advisory firm October Three. "This will likely require plan fiduciaries to monitor those advice fiduciaries' compliance" with the prohibited transaction exemption, the firm advised. "Sponsors will want to review the extent and scope of that monitoring obligation with their counsel and discuss with their providers how they intend to comply."

According to Groom Law Group, the FAQs "make clear that DOL intends to make further changes to the existing regulatory framework for providing fiduciary advice in the future, which may include promulgating a new fiduciary rule and amending or revoking other exemptions financial institutions currently rely upon in providing services to the retirement industry." 

Changes to the existing fiduciary advice regulation or exemptions would be made through notice and comment rulemaking, rather than through subregulatory guidance, Groom Law expects.

Related SHRM Articles:

Biden DOL Allows Investment Advice Fiduciary Rule to Take Effect, SHRM Online, February 2021

DOL Finalizes Less-Restrictive Fiduciary Standard for Investment Advice, SHRM Online, December 2020