New regulations on investment advice provided to participants in 401(k) or similar retirement plans, which were set to take effect on Dec. 22, 2021, won't take effect for several additional months, the U.S. Department of Labor (DOL) announced on Oct. 25.
Financial services companies that provide investment advice had requested additional time to comply with the new requirements.
In Field Assistance Bulletin No. 2021-02, the DOL said it would not pursue claims against investment advisors acting "diligently and in good faith" to comply with Prohibited Transaction Exemption (PTE) 2020-02—Improving Investment Advice for Workers & Retirees as follows:
- Through Jan. 31, 2022, the DOL will not pursue prohibited transactions claims against investment advice fiduciaries who are working diligently and in good faith to comply with the Impartial Conduct Standards set forth in the exemption.
- Through June 30, 2022, the DOL will not enforce the specific documentation and disclosure requirements for advice on rolling over assets from 401(k) plans to individual retirement accounts (IRAs). Under PTE 2020-02, for instance, if a rollover recommendation is being provided, advisors must document the specific reasons as to why the rollover is in the best interest of the retirement investor.
- Effective as of Feb. 1, 2022, all other requirements of PTE 2020-02 will be subject to full enforcement.
PTE 2020-02 was finalized in December 2020, at the end of the Trump administration. It was originally set to take effect on Feb. 16, 2021, but the incoming Biden administration provided transitional relief through Dec. 20, 2021.
"The class exemption provides meaningful protections for individual investors, and we continue to emphasize the importance of compliance," Ali Khawar, acting assistant secretary for the Employee Benefits Securities Administration, said in a statement. "Based 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."
In a legal alert, national law firm Eversheds Sutherland commented that the enforcement delay will "provide more time for vendors to perfect and investment advice fiduciaries to install reliable solutions for obtaining and processing the comparative cost information and other documentation DOL required under PTE 2020-02 for rollover advice," in particular.
However, Mike Webb, senior financial advisor in the New York City office of CAPTRUST, tweeted: "I wonder if the extension of the documentation and disclosure requirements to June 30, 2022, will be all that helpful given the fact that the rest of the rule will be subject to 'full enforcement' on Feb. 1."
Third-Party Payments to Advisors
PTE 2020-02 addresses fiduciary requirements under the Employee Retirement Income Security Act (ERISA) for professionals who recommend investments to participants in 401(k) or similar employer-sponsored plans and to IRA holders. It requires investment advisors providing such advice to act in plan participants' best interest as fiduciaries. However, it provides an exemption from ERISA that allows advisors to receive compensation directly from mutual fund companies, with certain restrictions. For instance, investment advice must be in the best interest of the investor and must not place any other interests ahead of that interest.
To receive the exemption, for instance, an investment professional or financial institution, among other requirements, must abide by impartial conduct standards: giving advice that is in the best interest of the investor. 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 PTE 2020-02.
Supporters of the exemption said it means participants don't pay out of their own pocket for advice, which might otherwise be unaffordable for them. Critics contended that allowing third-party payments to advisors inevitably raises concerns about participants receiving conflicted advice that is not in their best interest.
PTE 2020-02 did not directly place new compliance requirements on employers that sponsor retirement plans, benefits specialists said. However, employers that sponsor defined contribution retirement plans have a fiduciary responsibility to verify that any service providers they contract with to provide participants with investment advice are compliant with the new regulations—including advice offered through by the financial services firm that administers the plan and acts as record keeper.
Plan sponsors' fiduciary oversight includes understanding how and by whom investment advisors are being paid and whether those payments could result in conflicts of interest.
Replacement Rule Is Possible
"The DOL's Spring 2021 regulatory agenda advises that the department is considering whether to revisit the fiduciary rule," reported the National Association of Plan Advisors, a trade group.
The new relief, while helpful, is "less than DOL should have provided given the expected proposal of revised rules in the very near term," Eversheds Sutherland's attorneys commented.