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:
- 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
- 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:
- Satisfy the Impartial Conduct standards.
- Provide a written acknowledgement of fiduciary status.
- 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
- 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.
- 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.
- 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.