Nonenforcement Policies
Art by Tim Bower
ADVISER QUESTION: I’m a registered investment adviser [RIA], and I know if I recommend that an individual roll over 401(k) plan monies to an individual retirement account [IRA] that I manage, I’m considered an Employee Retirement Income Security Act [ERISA] fiduciary under the Department of Labor [DOL]’s expanded interpretation of fiduciary advice. I also know that I’ll need to comply with DOL Prohibited Transaction Exemption [PTE] 2020-02 in order to avoid a prohibited transaction. I understand that the DOL has extended its nonenforcement policy regarding the PTE. How will this affect me?
ANSWER: The DOL has extended, until January 31, 2022, its policy not to enforce the PTE, and it has extended its nonenforcement approach to the specific documentation and disclosure requirements for rollovers until June 30, 2022. However, there is no extension of the effective date for the expanded fiduciary definition or the obligation to comply with the impartial conduct standards, including the best interest standard.
Under the DOL’s expanded interpretation of investment advice, most distribution and rollover recommendations are now considered ERISA fiduciary advice for which the PTE will be needed. We discussed this in detail in our column “Now A Fiduciary.” The extension of the nonenforcement policy issued in Field Assistance Bulletin (FAB) 2021-02 gives you additional time to meet the conditions of the PTE. Note: The IRS has concurred with the nonenforcement policy, which is important, as that agency has enforcement jurisdiction over prohibited transactions in both qualified plans and IRAs.
The original nonenforcement policy was set to expire on December 20, and the one-month-plus extension gives you more time to work on compliance with the PTE’s conditions. Also, you have until next July 1, to comply with the requirement that you document the specific reasons why a rollover recommendation is in the best interest of the participant and provide that person with the documentation.
There are, however, some limitations on the extension.
First, the nonenforcement policy does not affect your fiduciary status. The DOL’s expanded interpretation of fiduciary advice was effective on February 16, and it has not been extended. Therefore you need to ensure that your rollover advice satisfies ERISA’s prudence standard and duty of loyalty.
Second, the policy is available only if you’re working “diligently and in good faith” to comply with the impartial conduct standards. In other words, the obligation to meet the impartial conduct standards applies now and has applied since February 16. The standards require: 1) satisfaction of the best interest standard of care, which is identical to ERISA’s duties of prudence and loyalty; 2) no more than reasonable compensation and best execution of recommendations; and 3) making no materially misleading statements.
This means you already must engage in a best interest process for rollover recommendations. Based on DOL guidance, you need to consider the participant’s options—leaving the money in the plan, taking a taxable distribution, rolling over to an IRA, and transferring to a new employer’s plan, if relevant, and then gather information so you can compare the services, fees and investments for each option. This information needs to be evaluated in light of the participant’s needs, investment objectives, financial circumstances and risk tolerance in order to determine whether the recommendation is in the person’s best interest. For risk management, the process should be documented.
Third, because the nonenforcement policy does not apply to your fiduciary status, private litigants still have the right to file lawsuits for fiduciary breach where violations occur. Note that while ERISA’s private rights of action apply to fiduciary breaches for advice to plans and participants—including rollover recommendations—it does not include private rights of action for violations related to standalone IRAs.
In sum, the extended nonenforcement policy provides additional time to meet conditions of the PTE. However, there are still some practices you need to have in place now. For rollover recommendations, you need to engage in a best interest process to satisfy your fiduciary duty under ERISA and to comply with the impartial conduct standards, which are a condition for the protection the policy affords.
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.