Now a Fiduciary

Art by Tim Bower

ADVISER QUESTION: I’m an RIA [registered investment adviser] who provides advisory services to individuals. I understand that if I recommend that an individual roll over plan monies to an IRA [individual retirement account] I manage, I’m considered an ERISA [Employee Retirement Income Security Act] fiduciary under the DOL [Department of Labor]’s expanded interpretation of fiduciary advice. And this means I’ll need to satisfy ERISA’s fiduciary standard of care and also to comply with a best interest standard under DOL prohibited transaction exemption [PTE] 2020-02 in order to avoid a prohibited transaction. What does DOL guidance say about the process I’ll need to undertake to satisfy this standard of conduct?

ANSWER: The DOL has issued guidance in the form of frequently asked questions (FAQ) that present the factors you will need to consider as part of a prudent analysis and the information you’ll need to obtain about the plan. Your analysis as to why the rollover is in the participant’s best interest will need to be documented, and you will need to establish policies and procedures that support the process.

In our previous column, we described how the DOL’s expanded interpretation of fiduciary advice will likely cause rollover recommendations by investment advisers to be fiduciary recommendations and why, as a result, relying on the PTE and complying with its conditions will be necessary to avoid a prohibited transaction. As we explained in that piece, the rollover advice must satisfy the ERISA prudence standard of conduct and duty of loyalty and, under the PTE, must comply with a best interest standard identical to those ERISA standards.

In the FAQ, the DOL describes the process by which one satisfies the best interest standard for rollover advice. It points out that the participant’s options—e.g., leaving the money in the plan, taking a taxable distribution, rolling it over to an IRA, and, if applicable, transferring the money to a new employer’s plan—need to be considered.

The agency emphasizes that the services, fees and investments in the plan, IRA and/or new employer’s plan should be compared. And this comparison should take into account factors such as: the different levels of services and investments under each option; whether the employer pays for some or all of the plan expenses; all investment options on the plan’s investment lineup—not just those allocated within the participant’s account; the long-term impact of any increased costs; and, as relevant, the impact of economically significant investment features such as surrender schedules, index annuity caps and participation rates.

Those factors, and other relevant facts, should be evaluated in light of the participant’s needs and circumstances to determine which alternative—e.g., stay in the plan or roll over to an IRA—is in that person’s best interest. That analysis should be documented to explain why the rollover recommendation is in his best interest.

In the FAQ, the DOL says that to obtain the relevant information, and to satisfy the documentation requirement, an adviser should make “diligent and prudent” efforts to get information about the participant’s plan.

Unfortunately, the agency does not describe what is required for the efforts to be “diligent and prudent,” though it notes that this information is “readily available” from the 404a-5 participant disclosure statement for the person’s plan. Obtaining this information may not be easy, however, especially if the participant is unwilling or unable to provide it.

Where a participant will not provide the information, even after a full explanation of its significance—the DOL doesn’t specify what an explanation should cover, though likely at least that the lack of that information could result in an incorrect recommendation—and the information is not otherwise readily available, the agency allows an alternative procedure. The adviser may make a reasonable estimation of expenses, asset values, risk and returns based on publicly available information—e.g., the most recent Form 5500 and reliable benchmarks on typical fees and expenses for the type and size of the plan at issue.

In those circumstances, the DOL says, the assumptions used, and their limitations, must be documented and explained to the participant.

In sum, you will need to develop a rollover process that takes into account the factors and considerations identified by the DOL. Also, you will need to establish policies and procedures that support compliance with the process and satisfy the other conditions in PTE 2020-02, as described in our previous column.

Fred Reish is chairman of the financial services ERISA practice at law firm Faegre Drinker Biddle & Reath LLP. Joan Neri, a nationally recognized expert in employee benefits law, is counsel in the firm’s financial services ERISA practice, where she focuses on all aspects of ERISA compliance affecting registered investment advisers and other plan service providers.