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Right now, investment professionals are deemed to be an ERISA fiduciary if their actions meet all factors of the 1975 Five-Part Test, which include providing advice to a retirement investor on a regular basis.¹ But soon, the Department of Labor’s (DOL) new definition of “fiduciary” for nondiscretionary investment advice on retirement plan, IRA and HSA assets will take effect. (See our previous articles, DOL Finalizes New Fiduciary Rule and What is Not Fiduciary Advice Under the DOL’s New Rule? for the details on the new definition.)

Beginning September 23, 2024, more investment professionals will be deemed fiduciaries when providing personalized recommendations to retirement investors, including one-time rollover advice.

If you’ll be a fiduciary, you’ll probably need a PTE to get paid

Investment professionals providing fiduciary investment advice (under the old or the new rule) are prohibited from receiving compensation that varies based on their investment advice and compensation from third parties, unless they meet the conditions in a prohibited transaction exemption (PTE). The DOL amended many of the existing PTEs so that PTE 2020-02 is the primary path to compliance.² Under the new fiduciary rule, PTE 2020-02 is expanded to, among other things, cover any investment product and can be used by robo-advice arrangements, pooled plan providers, and HSA financial institutions. The DOL states that financial institutions that already have robust policies and procedures to comply with the SEC’s Regulation Best Interest for broker-dealers should be in a strong position to comply with the “closely aligned revised conditions of PTE 2020-02.” Here are the effective dates and the PTE conditions that will be required.

Until 9/22/2024: Comply with existing PTE 2020-02

Investment professionals and their financial institutions who meet the definition of a nondiscretionary fiduciary under the 1975 Five-Part test must comply with the existing PTE 2020-02 (or other applicable exemption) to receive prohibited compensation for their recommendations. Providing one-time rollover advice to a retirement investor does not typically meet the old definition of fiduciary advice.

9/23/2024 – 9/22/2025: Meet Impartial Conduct standards & acknowledge fiduciary status

Beginning September 23, 2024, those who meet the DOL’s new definition of a nondiscretionary fiduciary must meet the conditions of the amended PTE 2020-02. But the DOL has provided a one-year transition period for compliance. During this period, investment professionals and their financial institutions relying on PTE 2020-02 must meet these conditions:

1. Satisfy the Impartial Conduct standards when giving fiduciary investment advice
   • Meet the care obligation (give prudent, expert advice based on the needs of the retirement investor)
   • Meet the loyalty obligation (never put the interest of the investment professional, financial institution, or affiliate ahead of the investor’s interests)
   • Make no misleading statements, including omissions of relevant information (e.g., about investments, conflicts, or fees)
   • Receive no more than reasonable compensation

2. Provide a written acknowledgement of fiduciary status under ERISA and/or the Code to the investor by the later of the date the recommendation is made or the date the professional or their financial institution is entitled to compensation for the recommendation. Model language is included in the expanded PTE 2020-02 – and it is different from what was acceptable under the existing PTE 2020-02.

Beginning 9/23/2025: Full compliance with amended PTE 2020-02

Beginning September 23, 2025, investment professionals and their financial institutions relying on PTE 2020-02 must meet these conditions:

1. Satisfy the Impartial Conduct standards.
2. Provide a written acknowledgement of fiduciary status.
3. Provide written disclosures to the investor:
   • The care and loyalty obligations owed to the investor (model language in PTE)
   • All material facts relating to the scope and terms of the relationship with the investor, including fees and any limitations on recommendations (similar to Reg BI requirements under the SEC)
   • All material facts relating to conflicts of interest related to the recommendation (similar to Reg BI requirements under the SEC)
   • The investor’s right to obtain additional information
   • The bases for rollover recommendations for ERISA Title I plan assets or how to invest those assets post-rollover

4. The financial institution must develop, follow, and enforce policies and procedures designed to
   • Ensure compliance with PTE 2020-02, and
   • Mitigate conflicts of interest so there are no incentives to put the investment professional’s or financial institution’s (or an affiliate’s) interests ahead of the investor’s interests.

5. The financial institution must conduct an annual retrospective review to detect and prevent violations of PTE 2020-02 and submit a report to a senior executive.
6. The senior executive must certify the report, that the institution has corrected violations and filed Form 5330 and paid any excise tax for nonexempt prohibited transactions, and that the institution has policies and procedures in place and a prudent process for updating them.

More on rollovers

If a fiduciary recommendation is made to roll over funds from an ERISA Title I retirement plan or how to invest those assets post-rollover, the investment professional must analyze the investor’s rollover options by comparing certain factors for each option. The analysis must be documented and provided to the investor. The relevant factors that must be analyzed include

• The alternatives to a rollover, including leaving money in the current plan,
• The fees and expenses associated with the plan and the recommended investment or account,
• Whether the employer pays for any of the plan’s administrative expenses, and
• The different levels of services and investments available under the plan and the recommended investment or account.

Although PTE 2020-02 does not require a rollover disclosure for a recommendation to roll over IRA assets, the other conditions of the PTE must still be met and, in the DOL’s view, should include documentation of a rollover analysis to prove compliance with the care and loyalty obligations.

Compliance Insights

• The amended PTE does not apply to ongoing compensation, including through a systematic purchase payment or trailing commission, received for a recommendation that was made before September 23, 2024. The amended PTE applies to new fiduciary investment advice provided on or after September 23, 2024.
• Financial institutions complying with the existing PTE 2020-02 may reduce their compliance efforts to what is required during the one-year transition period but should consider whether it would be more challenging to temporarily reduce compliance if they are already doing most of what will be required after the transition period.
• Although financial institutions are not required to have policies and procedures in place to comply with amended PTE 2020-02 until September 23, 2025, they may need to implement some by September 23, 2024, to ensure that advisors are complying with the Impartial Conduct standards and fiduciary acknowledgment requirement.

IRALOGIX will continue to provide insights on the DOL’s fiduciary rule and PTE 2020-02, including whether pending litigation is successful in delaying the implementation date or vacating all or part of the new rule. In the meantime, investment professionals and financial institutions whose service models will trigger fiduciary status under the new rule should prepare to comply by September 23, 2024.

Footnotes

¹ ERISA Sec. 3(21)(A)(ii) regulations: 29 CFR 2510.3-21(c)(1)

² An amended PTE 84-24 is available for independent insurance agents. Also, the existing statutory exemption under ERISA §408(b)(14) for participant or IRA holder investment advice provided through a level-fee or computer model arrangement meeting certain conditions is still available. See 29 CFR 2550.408g-1.

The Department of Labor’s (DOL) new definition of fiduciary investment advice for retirement investors becomes effective September 23, 2024. Under the new rule, more brokers, advisors, and insurance agents will be held to an ERISA fiduciary standard when providing individualized recommendations to retirement plan participants and IRA investors, including one-time rollover or distribution advice. Not all recommendations and communications made to retirement investors will trigger fiduciary status though.

To trigger functional fiduciary status for a specific recommendation, a financial professional must meet all these requirements:

• The advice giver is (directly or indirectly through or with an affiliate) in the business of making professional investment recommendations
• The recommendation is personalized based on the retirement investor’s particular needs or individual circumstances (recommendation includes a call to action)
• A reasonable investor in like circumstances would believe the recommendation is based on the investor’s best interests
• The financial professional (or an affiliate) receives compensation in connection with the recommendation

If the facts and circumstances surrounding a recommendation do not meet these requirements, the recommendation will not be subject to the fiduciary rule.

Communications That Are Not Fiduciary Advice

The DOL’s preamble and final regulations identify certain types of communications that generally do not fit the definition of fiduciary investment advice, so long as the financial professional has not acknowledged fiduciary status and does not make a personalized recommendation to the retirement investor.

• “Hire me” communications touting the advisor’s services and other information about their (or an affiliates’) services
• A sales pitch that includes a recommendation to purchase a particular investment or pursue a particular strategy (e.g., “You’ll love the return on X stock in your retirement plan, let me tell you about it.”)
• Investment education and information on retirement savings
• Offering or marketing of a platform with a set line-up of investments (e.g., an IRA product)
• Service provider call center communications involving investment-related information

Investment Education or Information Defined

The DOL defined “education” vs. advice in 1996 (Interpretive Bulletin (IB) 96-1) and has confirmed in the 2024 final rule that those interpretations still apply.1 This is the case irrespective of who provides the information (e.g., plan sponsor, fiduciary, or service provider), the frequency with which the information is shared, and the form in which the information is provided (e.g., on an individual or group basis, in writing or orally, or via video or computer software). In an interview with American Retirement Association’s Brian Graff, Tim Hauser, the deputy assistant secretary for program operations of the Employee Benefits Security Administration, stated that the DOL is not trying to “move any of those lines” with the new rule.2

Based on IB 96-1 and current DOL guidance, the following types of information may be provided to retirement savers without triggering ERISA Title I or Title II fiduciary status, so long as a personalized recommendation is not made.

Next Time

Some advisors and service providers may choose to limit their product and rollover communications to educational services. If they refrain from making recommendations that meet all aspects of the new definition of fiduciary advice, they would not be subject to the DOL’s fiduciary rule for providing this information.

If financial professionals make recommendations to retirement investors that meet the DOL’s definition of fiduciary investment advice, compensation for that advice is prohibited unless they satisfy the conditions of Prohibited Transaction Exemption (PTE) 2020-02 (or PTE 84-24 for independent insurance agents).

Stay tuned for IRALOGIX’s next article on how those who provide rollover recommendations subject to the DOL fiduciary rule can structure their services to comply with PTE 2020-02, satisfy the fiduciary standards, mitigate conflicts of interests, and receive compensation that would otherwise be prohibited (because the compensation would not have been paid but for the recommendation).
 

 
1 Interpretive Bulletin 96-1, June 11, 1996, https://www.federalregister.gov/documents/1996/06/11/96-14093/interpretive-bulletin-96-1-participant-investment-education

2 “Tim Hauser – the Final Fiduciary Rule’s Myths and Controversies,” DC Pension Geeks podcast, May 13, 2024, The American Retirement Association, https://www.napa-net.org/dc-pension-geeks-podcast

Financial professionals working with retirement savers will be subject to a new rule that goes into effect on September 23, 2024. The Department of Labor (DOL) has updated the rule under ERISA and the Internal Revenue Code that defines when a person is a fiduciary for providing nondiscretionary advice to a retirement plan sponsor or an individual investor in a workplace retirement plan, IRA, or HSA. Under the new rules, more brokers, advisors, and insurance agents will be held to a fiduciary standard when providing personalized recommendations to retirement investors, including one-time rollover advice.

The DOL updated its 1975 rule to reflect today’s complex retirement savings market and to better protect retirement investors by requiring trusted advice providers to follow high standards of care and loyalty when making investment recommendations. The updated rule, according to the DOL, fills important gaps in its and other regulatory agencies’ rules to ensure that financial professionals adhere to more uniform conduct standards and mitigate their conflicts of interest whether they make recommendations to retirement investors on securities or non-securities investments, or recommendations to move retirement savings to another plan or IRA. 

New Definition of Investment Advice Fiduciary

The new rule replaces the 1975 five-part test for determining when nondiscretionary investment recommendations trigger fiduciary status. The new test focuses on whether a financial professional has effectively held themselves out as occupying a position of trust and confidence with respect to the retirement investor. Three criteria must be met:

1. Directly or indirectly (e.g., through or together with any affiliate) make professional investment recommendations regularly, as a part of their business
2. The circumstances reasonably indicate that a recommendation
   • is based on a review of the retirement investor’s particular needs or individual circumstances,
   • reflects the application of professional or expert judgment, and
   • may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest
3. Receive a fee or other direct or indirect compensation in connection with the recommendation

A financial professional is also an investment advice fiduciary if they represent or acknowledge that they are acting as an ERISA fiduciary, and receive a fee or other compensation, with respect to the recommendation. 

Changes in the New Rule

• Does not include a private right of action for IRA investors, or other contract or warranty requirements that were part of the 2016 rule that was vacated by Fifth Circuit in 2018
• Sole remedies for non-compliance are those set forth in ERISA and the Code, which include only the imposition of excise taxes in the context of advice to IRAs
• Is broader than the 1975 rule but more narrow than the 2016 rule or the 2023 proposal as to the recommendations that constitute fiduciary advice and makes clear that the new fiduciary status test is objective
• Confirms that sales executions or sales recommendations that do not satisfy the objective test are not fiduciary advice
• States that investment information or education is not fiduciary advice
• Explains that an asset manager does not render fiduciary advice by making recommendations to a financial professional or firm that, in turn, will render advice to retirement investors in a fiduciary capacity

Investment Advice Fiduciary Needs PTE

Financial professionals who meet the DOL’s definition of investment fiduciary must satisfy the conditions of a prohibited transaction exemption (PTE) to mitigate conflicts of interests and receive payment that would otherwise be prohibited because the payment is directly affected by the recommendation. The DOL amended several of its existing PTEs to ensure all retirement investors receive the same standard of care, regardless of the product or service they receive. As a result, the only exemptions available for receiving conflicted compensation is PTE 2020-02 for advice with respect to the wide universe of investments recommended to retirement investors, and PTE 84-24 for recommendations by independent insurance agents.

The DOL states that the compliance obligations in PTE 2020-02, even with amendments, are generally consistent with those set forth in the SEC’s Regulation Best Interest (Reg. BI) and Interpretation of Conduct for Investment Advisers for advice to retail customers on securities. Therefore, broker-dealers and investment advisers that have already adopted compliance with Reg. BI or the fiduciary obligations under the Advisers Act should be able to adapt easily to the amended PTE.

Changes to PTEs

Finalized changes to PTE 2020-02 include coverage of pure robo-advice, pooled plan providers, and non-bank custodians for HSAs, clarifications on disqualifications from using the PTE, and the requirement to self-report and pay excise taxes to the IRS for non-exempt PTs. Another change from the proposal narrows when rollover disclosures are required. As amended, PTE 2020-02 only requires rollover disclosures for rollover recommendations from an ERISA Title I retirement plan and recommendations as to the post-rollover investment of assets currently held in a Title I plan. Rollover disclosures will no longer be required for advice to roll over from one IRA to another IRA or to change account type. The DOL notes, however, that advisors still have fiduciary care and loyalty obligations to make prudent efforts to obtain information about fees and investment options, and that demonstrating compliance will likely be difficult without documenting the basis for such recommendations.

PTE 84-24, as amended, does not require insurance companies to assume fiduciary status with respect to independent insurance agents.

Next Steps

The 2024 final rule and PTE package are scheduled to take effect September 23, 2024, with a one-year transition period for complying with the changes to PTE 2020-02 and PTE 84-24. During this time, investment advice fiduciaries must comply with the Impartial Conduct Standards and provide a written acknowledgment of fiduciary status.

The DOL has been attempting to update its fiduciary rules for years without longstanding success. While there are many supporters of these efforts to update the rules and protect retirement investors from advisors making recommendations based on their own financial interests, there are many stakeholders in the industry who are opposed to these changes for being too broad and the potential for making investment advice more expensive and less accessible for retirement investors because of additional compliance costs. Lawsuits seeking to delay the effective date or vacate all or parts of the rule/PTE package are expected.

As always, IRALOGIX continues to attentively monitor this regulation. Our platform and procedures will continue to assist our clients in navigating these regulatory requirements with minimal disruptions to their operations. We will provide further updates in the months ahead.

Dave Bernard steps down; board appoints Peter de Silva to lead company into its next growth phase

IRALOGIX, a leading retirement industry fintech provider, today announced that Dave Bernard stepped down as chief executive officer effective immediately. The board has appointed Peter de Silva as the new CEO of IRALOGIX. de Silva has been an IRALOGIX investor and board member for the past two years. He is a nationally recognized and highly accomplished financial industry executive.

“On behalf of the board, I want to thank Dave and the IRALOGIX team for the great job they have done in leading the company from a fledging startup to a truly disruptive force in the retirement market,” says Jim Smith, an IRALOGIX board member. “During his tenure Dave has been instrumental in not only building out a great product and a cutting-edge technology platform, but also assembling a very talented group of employees and senior leaders.”

de Silva assumes the reins at a critical juncture in IRALOGIX’s history as it continues to mature as a company. Last fall’s successful capital raise allows IRALOGIX to capture the significant growth opportunities ahead. de Silva has more than 35 years experience leading established companies in the financial services industry, including roles as president of TD Ameritrade’s retail business, president of Scottrade Financial Services, CEO of UMB Bank, and 17 years of experience at Fidelity Investments in various leadership roles.

“This is a really exciting time for IRALOGIX, its employees, and clients,” says de Silva. “We’ve had tremendous success helping to redefine and in many cases disrupt the wealth industry beginning with IRAs . My objective is to continue our innovative heritage, while speeding up our growth trajectory, scaling our business, and expanding our client base and distribution channels. I am thrilled to be given this opportunity to lead IRALOGIX as it enters its next lifecycle and to help solidify our mission of transforming the retirement experience for every investor in America.”

IRALOGIX enables institutional partners to rapidly launch profitable white-label IRA programs that leverage institutionally priced investments as well as professional advice and education. The company’s modular technologies are cloud-native and support a fully paperless process with no account minimums.