Compliance August 14, 2024

A Compliant Process for Plan-to-IRA Rollovers

Fred Reish and Joan Neri detail how RIAs can comply with current rules while the new DOL fiduciary rule remains in limbo.

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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.

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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.

Compliance August 13, 2024

401(k) Forfeiture Lawsuits Seeing Their Day in Court

A new complaint is filed and others are moved ahead involving Bank of America, Intuit and Qualcomm.

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Using 401(k) plan forfeitures to offset employer contributions has been a longstanding practice permitted by U.S regulators, according to experts. But recent litigation scrutinizing plan fiduciaries’ use of forfeitures under the Employee Retirement Income Security Act continues both to be filed and to progress in the courts.

In recent weeks, a new class action complaint was filed, and two existing lawsuits survived district court challenges by the defendant companies.

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Bank of America

On August 9, Bank of America Corp. was the latest company to be hit with a class action lawsuit alleging use of forfeited plan money for its own gain.

Esmerelda Becerra, a participant in the Bank of America 401(k) Plan and represented by Haffner Law PC, filed a lawsuit against the company’s retirement plan committee in U.S. District Court for the Central District of California, alleging the plan committee used forfeited plan assets to reduce its employer contribution obligations, rather than for the benefit of plan participants, therefore violating ERISA.

According to the complaint, Becerra v. Bank of America Corp., participants in the plan immediately vest in their own contributions and receive a matching employer contribution after three years of service. As a result, participants who leave the company before they are fully vested forfeit the employer contributions they would have otherwise received.

Becerra claims that in using those forfeited fund assets toward future employer contributions, Bank of America “harmed the plan and participants in the plan, including by reducing plan assets and not allocating forfeited funds to participants’ accounts.”

The complaint further accuses Bank of America of breaching its fiduciary duty of prudence by failing to “engage in a reasoned and impartial decision making process in deciding to use the forfeited funds in the plan to reduce the company’s own contribution expenses.”

According to the IRS, which reaffirmed its position in 2023, 401(k) plan forfeitures can be used for any of three permitted purposes: to pay plan expenses, to reduce future employer contributions or to make an additional allocation to participants. 

Intuit Inc.

In a separate case against software company Intuit Inc., the U.S. District Court for the Northern District of California granted a former employee, Deborah Rodriguez, represented by Hayes Pawlenko LLP, the right to advance her case against the company over claims that the firm reallocated forfeited funds for its own benefit, to the “detriment of the plan and its participants.”

Rodriguez v. Intuit Inc. was first filed on October 2, 2023, and Intuit moved to dismiss the lawsuit on December 18, 2023. On Monday, the district court granted Intuit’s motion to dismiss for failure to monitor fiduciaries, which it ruled it had done, but denied Intuit’s other arguments for dismissal.

The initial complaint cited an example from 2021, when Intuit allocated $74,000 of forfeited funds to pay plan expenses totaling $975,000 that year, leaving a balance of approximately $140,000 in the forfeited account.

U.S. District Judge P. Casey Pitts ruled that the lawsuit validly alleges that Intuit breached its fiduciary duties of loyalty and prudence under ERISA and that Rodriguez pleaded sufficient facts to support her claim that “the plan as a whole was damaged.”

Pitts also ruled that Rodriguez provided a plausible interpretation of Intuit’s plan document as prohibiting the use of forfeitures to offset anything other than Intuit’s safe harbor matching contributions and profit-sharing contributions.

Additionally, Intuit argued in its motion to dismiss that Rodriguez failed to allege that Intuit acted as a fiduciary, arguing instead that it functioned as a settlor and that the company’s decision to offset matching contributions with forfeitures is “fundamentally a decision regarding how much Intuit will contribute to the plan” and thus a settlor function. Pitts ruled that this argument lacked merit.

“Although Intuit’s decision about how to allocate those plan assets undoubtedly effected the amount it would contribute as settlor each year, by the plan’s own terms it was making decisions about the management and disposition of plan assets,” Pitts ruled. “As such, it acted in a fiduciary capacity when making those decisions.”

Carol Buckmann, founder, partner and ERISA attorney at Cohen & Buckmann P.C., had previously said that the issue of forfeitures is not a fiduciary decision, as it is longstanding ERISA policy that decisions on plan design, how to fund a plan and the level of contributions are “settlor decisions” and are not fiduciary in nature.

Qualcomm Inc.

Finally, U.S. District Judge Roger T. Benitez in U.S. District Court for the Southern District of California denied Qualcomm Inc.’s motion to reconsider a lawsuit filed against the company by a plan participant in October 2023, also alleging that the company chose to use forfeited funds for its own benefit by reducing employer contributions.

The participant, Antonio Perez-Cruet, is also represented by Hayes Pawlenko LLP in Perez-Cruet v. Qualcomm Inc. et al.

Qualcomm argued the court should reconsider the case primarily because the IRS regulation “should be understood to shield [their] decision as plan fiduciaries from ERISA liability.”

Benitez stated that a motion for reconsideration cannot be granted unless the court is presented with newly discovered evidence, committed clear error or if there is an intervening change in the controlling law. As Qualcomm merely reiterated arguments made in its prior motion to dismiss, Benitez denied the request for reconsideration.

According to analysis by ERISA attorney Buckmann, the Department of Labor has never objected to the longstanding IRS position on plan forfeitures, but it is important that plan sponsors authorize the use of forfeitures in their plan’s language.

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