A new rule from the Labor Department for advisors and firms working with potential client rollovers went into effect Friday.
In a webinar Thursday, Faegre Drinker partners Fred Reish and David Porteous teamed with Fiduciary Decisions CEO Tom Kmak to share insights on potential compliance problems with the new prohibited transaction exemption, PTE 2020-02. Here are some key takeaways from the webinar to help you avoid compliance problems.
1. Understand the Exemption's Requirements and Scope
Reish has observed several compliance errors in this area, including:
- Firms are not providing retirement investors with the newly required fiduciary status acknowledgement
- Some firms don't realize that the new rules apply to both plan-to-IRA and IRA-to-IRA rollover recommendations
- There have been failures to disclose that both types of rollover recommendations are conflicts of interest
- Firms and advisors lacking policies and procedures to mitigate rollovers' conflicts of interest
2. Tighten Up Your Best-Interest Process
The exemption requires that advisors understand a participant's circumstances and objectives. In order to make an objective rollover recommendation, though, you also need to have detailed information about the available alternatives, investments, services and expenses in the participant's current plan. You'll need the same information about the rollover IRA account. With those two sets of information, Reish said, it's possible to "evaluate the plan and IRA information in light of the retirement investor's profile."
Additionally, under the new rule, retirement clients must be provided with specific, written reasons why a rollover recommendation is in their best interest. Consistently collecting, analyzing and presenting all the required information makes the case that advisors should adopt and follow a written process workflow for both internal use and with the client.
3. Collect the Data
Details on your firm's rollover IRA normally will be available but be prepared for possible challenges collecting the required data on some participants' plans. In FAQ No. 15 of its PTE 2020-02 guidance, the department explains that it's not an optional step: "… investment professionals and financial institutions should make diligent and prudent efforts to obtain information about the existing employee benefit plan and the participant's interests in it."
The department writes that the required information should be "readily available" in the disclosure documents plans give their participants.
