An Objectivity Lesson
Art by Tim Bower
ADVISER QUESTION: I’m a registered investment adviser [RIA] who provides investment education to Employee Retirement Income Security Act [ERISA] plan participants about plan rollovers. The participant then decides whether to roll over the funds to an individual retirement account [IRA] I manage. Would I be considered an ERISA fiduciary under the Department of Labor [DOL]’s expanded interpretation of fiduciary advice, and will I need to use the department’s Prohibited Transaction Exemption [PTE] 2020-02 in order to avoid a prohibited transaction?
ANSWER: It depends. If the information you supply to participants is accurately presented in an objective manner without an implied recommendation to roll their account over to an IRA with you, then you are not providing fiduciary advice for the rollover, and the PTE would be unnecessary. However, if the information is tantamount to an implied recommendation, then your advice does meet the ERISA definition, and you’ll need to use the PTE. For example, one senior DOL official has said that presenting a participant with an intended portfolio of investments for a rollover IRA would be an implied recommendation.
The starting place for distinguishing between investment advice and education is the DOL’s Interpretive Bulletin 96-1. While that guidance applies to defined contribution (DC) plans, it is informative for the IRA rollover scenario. In the bulletin, the DOL identifies four categories of information that do not constitute investment advice, namely: 1) plan information; 2) general financial and retirement information; 3) general information about asset-allocation models; and 4) interactive investment materials. All of this information must be presented in an objective manner.
For instance, the bulletin states that asset-allocation models must be discussed as being portfolios for hypothetical individuals with varying time horizons and risk profiles based upon generally accepted investment theories and accompanied by all material facts and assumptions. If the model identifies any specific investment, then the materials must include a statement that other funds with similar risk and return characteristics may be available under the plan and identify where information about those funds can be obtained. The materials must also state that investors should consider their other assets, income and investments in determining whether to apply the model to their individual situation.
Based on this guidance, if you give plan participants objective comparisons of the advantages and disadvantages of staying in a plan as compared with an IRA rollover, you’ll be providing investment education. On the other hand, if you present a participant with a customized asset-allocation portfolio for the IRA that includes specific investments such as mutual funds, exchange-traded funds (ETFs), etc., there is a risk that the DOL will view this as an implied rollover recommendation outside the scope of investment education. That’s because, while DC plans offer a limited number of investments selected by the plan sponsor, the same is not true of IRAs, which have access to an almost unlimited number of investments. If you mention any specific ones, it suggests that you’re recommending them for the IRA.
And, if the proposed IRA portfolio for a participant is considered an implied rollover recommendation, you will be providing fiduciary advice under the DOL’s five-part test: 1) providing advice about investments for a fee, 2) on a regular basis (discussed below), 3) under a mutual understanding, 4) that the advice will form a primary basis for the investment decisions—i.e., both selling the plan assets and investing the rollover cash in the IRA—and 5) the advice is individualized based upon the investor’s particular needs.
Under the DOL’s expanded interpretation, the regular basis requirement will be met because the implied recommendation to liquidate the investments in the participant’s plan account and to invest in the proposed portfolio in the IRA are the initial steps in what is expected to be an ongoing financial relationship in connection with the rollover IRA. As you will be receiving an IRA advisory fee if your fiduciary recommendation is accepted, you will have engaged in a prohibited transaction and will need to satisfy the conditions of the PTE for relief from it.
Incidentally, these same issues could arise in the context of other rollovers. The DOL defines “rollover” broadly to include one from a plan to an IRA, from a plan to a plan, from an IRA to a plan or from an IRA to an IRA; also considered rollovers are a change of account type for a plan or an IRA—e.g., from commission-based to fee-based.
In sum, you should review your current investment education practices to ensure that the information presented to investors does not constitute an implied recommendation to roll over account savings to an IRA with you.
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.