The DOL’s expanded definition of fiduciary advice is described in the preamble to PTE 2020-02.
The PTE then provides relief for conflicted non-discretionary recommendations (for example, rollover recommendations), if its conditions are satisfied.
While most rollover discussions are about recommendations to participants in 401(k) and 403(b) plans, the fiduciary definition is broader than that. For example, it also covers rollover recommendations to participants in defined benefit pension plans.
This article discusses how the fiduciary definition and PTE 2020-02 apply to defined benefit plans.
The DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees), allows investment advisers, broker-dealers, banks, and insurance companies (“financial institutions”), and their representatives (“investment professionals”) , to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to ERISA retirement plans, participants (including rollover recommendations), and IRA owners (all of whom are referred to as “retirement investors”).
In addition, in the preamble to the PTE the DOL announced an expanded definition of fiduciary advice, meaning that many more financial institutions and investment professionals are fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.
A rollover recommendation will ordinarily be nondiscretionary fiduciary advice and will result in a financial conflict of interest that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is nondiscretionary, PTE 2020-02 will provide relief, but only if all of its conditions are met.
Most of my rollover articles have been in the context of ERISA 401(k) and 403(b) plans, that is, participant-directed retirement plans. However, the fiduciary definition covers rollover recommendations to other kinds of plans as well. This article discusses rollover recommendations that are made to participants in defined benefit pension plans.
The preamble to PTE 2020-02 explains the DOL’s interpretation of the fiduciary rule as applying to Plan-to-IRA rollover recommendations (as well as to other retirement account related recommendations). For example, where an investment professional recommends a Plan-to-IRA rollover and will provide ongoing financial advice services to the rollover IRA, that would be fiduciary advice for the rollover (under the DOL’s expanded interpretation). The recommendation would result in a fiduciary prohibited transaction because the recommendation, if accepted, will result in the fiduciary receiving a financial benefit (egthe fees or commissions from the rollover IRA).
The PTE describes the following recommendations as being rollover recommendations: any recommendation to roll over assets from a Plan to another Plan or an IRA as defined in Code section 4975(e)(1)(B) or (C), from an IRA as defined in Code section 4975(e)(1)(B) or (C) to a Plan, from an IRA to another IRA, or from one type of account to another (eg, from a commission-based account to a fee–based account)….
For purposes of this article, the question is, what is the definition of a “Plan” for rollover recommendations?
As you might expect, the DOL answers the question (although the answer is a bit difficult to find). In footnote 15 to the preamble to the PTE, the DOL says: For purposes of any rollover of assets from a Title I Plan to an IRA described in this preamble, the term ”Plan” only includes an employee pension benefit plan described in ERISA section 3(2) or a plan described in Code section 4975 (e)(1)(A), and the term ”IRA” only includes an account or annuity described in Code section 4975(e)(1)(B) or (C).
That takes us on a search that lawyers might love, but real people hate. (For example, a rational person might ask, “Why can’t they just tell us what they mean?”) So, off we go on a chase of cross references.
If you turn to ERISA and search for section 3(2), you will find the following:
(two)(A) Except as provided in subparagraph (B), the terms “employee pension benefit plan” and “pension plan” mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program
(i) provides retirement income to employees, or
(iii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the planthe method of calculating the benefits under the plan or the method of distributing benefits from the plan.
If you’re not used to reading technical statutory language like this, don’t worry about it. Here’s the lay version: any private sector retirement plan set up by an employer for its employees.
What about the cross reference to the Internal Revenue Code? Here’s what it says:
For purposes of this section, the term “plan”means—
(A) a trust described in section 401(a) which forms a part of a plan, … which trust or plan is exempt from tax under section 501(a),…
Short and sweet, that means that any qualified plan is a “Plan” for rollover purposes.
So where does this leave us? All ERISA-governed retirement plans and all qualified plans are “Plans” for rollover purposes. That includes, for example, 401(k) plans, private sector 403(b) plans, profit sharing plans, ESOPs, money purchase pension plans, cash balance plans and defined benefit pension plans.
Broker-dealers, investment advisers, banks and trust companies, and insurance companies need to be aware of this and have rollover recommendation solutions specifically designed for pooled plans such as defined benefit pension plans.
Thus far, my experience is that while many firms have rollover strategies for participant-directed plans, they do not for pooled plans. The differences in the information needed and the analytical approach are day-and-night. But, in all cases, the recommendation must be in the best interest of the participant.