A Compliant Process for Plan-to-IRA Rollovers

Question: I am a registered investment adviser who provides advisory services to individuals. I understand that the new, expansive Department of Labor fiduciary rule that would have gone into effect on September 23 is now stayed. If I recommend that an individual roll over plan monies to an individual retirement account that I manage, what process do I need to undertake to be compliant with the current rules?

Answer: If you already are a fiduciary to an ERISA plan and you recommend that the participant roll over plan monies to the IRA, then the recommendation will likely be considered a fiduciary act by the DOL. As such, you will need to undertake a process that satisfies the ERISA duties of prudence and loyalty and you will need to comply with the conditions of DOL Prohibited Transaction Exemption 2020-02 in order to receive your IRA management fee.

If you do not have a preexisting fiduciary relationship with the plan, you would need to follow a similar process under the Securities and Exchange Commission’s best interest standard (although compliance with the PTE will not be needed). In other words, even though the new DOL fiduciary rule is stayed, you will have to undertake a similar best interest process for rollover recommendations—whether under the current DOL position or the SEC guidance. This article describes that process.

Fred Reish

The DOL’s guidance about what constitutes a compliant process for a fiduciary adviser who recommends a rollover is found in the preamble to PTE 2020-02, in which the DOL explains that the best interest standard for rollovers mirrors the ERISA duties of prudence and loyalty. The SEC describes a similar best interest standard for rollover recommendations in its 2019 Investment Adviser Interpretation. The SEC staff, in its bulletin, “Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors,” provides additional details on the process required to make a compliant rollover recommendation. The SEC’s standards have broader application than the DOL rules. They apply to rollover recommendations from all plans, including non-ERISA plans such as governmental plans.

Under both the SEC bulletin and DOL guidance, the best interest process is generally the same, consisting of the following three steps:

(1)    Obtaining information about the plan participant that is needed to make a best interest recommendation;

(2)    Obtaining information about the participant’s plan features and the contemplated rollover IRA, including the investments, services and costs in each; and

(3)    Evaluating the information collected in (1) and (2) to determine the option (i.e., staying in the plan or rolling over) that is in the participant’s best interest.  

Obtaining Information About the Plan Participant

Joan Neri

SEC staff explains that the best interest process should include consideration of characteristics such as the participant’s financial situation, tax status, age, investment time horizon, liquidity needs, risk tolerance, investment experience, investment objectives and financial goals. Similar to this approach, the DOL’s best interest standard under current PTE 2020-02 requires that the recommendation be “based on the investment objectives, risk tolerance, financial circumstances and needs” of the plan participant.

In other words, in the view of both agencies, the best interest process is not a one size fits all approach, but instead requires that you consider what is important for meeting that particular participant’s needs—e.g., active management, asset allocation services, periodic withdrawals, etc.

Obtaining and Evaluating Information About the Current Plan Account and the Recommended IRA

The SEC staff bulletin identifies specific factors about the current plan account and the recommended IRA that should be considered in determining whether a rollover is in the participant’s best interest. These factors include: the costs; level of services available; features of the existing plan account (including holdings of employer stock); available investment options, ability to take penalty-free withdrawals; application of required minimum distributions; and protection from creditors and legal judgments.  

The DOL also references factors such as these in describing the comparative analysis of the current plan account and proposed IRA that should be used to determine whether a rollover is in the participant’s best interest. In addition, according to the DOL, a best interest recommendation requires that you consider not only two options—leaving the money in the current plan or rolling it over to an IRA—but also the participant’s other options, such as rolling over to the plan of a new employer (if the employee is switching jobs and the new plan accepts plan rollovers) or taking a taxable distribution. Similarly, for SEC compliance, the plan of a new employer is an account type that may need to be considered in determining which account type is in the participant’s best interest.

Documenting the Analysis and the Best Interest Determination

The SEC does not require specific documentation of the process, the information evaluated or the reasons for recommending the rollover. However, in its bulletin, the SEC staff points out that it will be difficult to periodically assess the adequacy of policies and procedures or to demonstrate compliance with the best interest standard without documenting the basis for the recommendation.

PTE 2020-02 is more specific and requires that the underlying documentation necessary to prove compliance with the PTE conditions, including the best interest standard, be retained for six years. Further, PTE 2020-02 requires that the participant be provided with a pre-rollover disclosure of the specific reasons why the rollover recommendation is in the participant’s best interest. As a result, even if relief under PTE 2020-02 is not needed, it is a best practice to document the basis for the recommendation. 

Concluding Thoughts

You should undertake a best interest process for rollover recommendations, regardless of whether the rollover recommendation is considered a fiduciary act under the DOL rules. This is because the SEC’s best interest standard applies to rollover recommendations, and its requirements are similar to the DOL’s best interest process.