3987 / When does the DOL investment advice fiduciary PTE 2020-02 apply to rollover transactions?

In the finalized fiduciary release, the DOL was clear that one-time recommendations (including rollovers and annuity sales) can create fiduciary liability under the 2024 definition of investment advice fiduciary.  The DOL has stated that under the old five-part test, investment advice “provided on a "one-time" basis, like many recommendations to roll retirement savings out of a workplace retirement plan and into an IRA, was typically not treated as fiduciary advice and therefore was not protected by ERISA's fiduciary safeguards. Yet, one-time advice is often the most important advice the retirement investor will ever receive…. The new rule and exemptions close the loopholes that defeat legitimate investor expectations by holding trusted advisers to a fiduciary standard. When an individualized recommendation comes from an investment professional holding themselves out as someone who is acting in the investor's best interest, it is only right that the advice meet a fiduciary standard.”

The DOL exemption for fiduciary advice specifically applies to rollover advice, assuming the circumstances qualify under the test for determining whether the advisor is an investment advice fiduciary (see Q 3986). Rollovers from a 401(k) to an IRA, IRA to IRA, or one type of account to another (i.e., from a fee-based account to a commission-based account) are all potentially covered by the exemption.

Under the 1975 five-part test, which now no longer applies, the DOL commentary included with the exemption stated that not every rollover triggered investment advice fiduciary status. A facts-and-circumstances analysis was required in every case to determine whether the transaction was subject to the new standard. Specifically, the DOL noted that it did not intend to apply the guidance in DOL Advisory Opinion 2005-23A (the Deseret Letter), which would have found that rollover advice generally does not constitute investment advice.

Under the 2024 rule, if the one-time recommendation otherwise causes the advisor or firm to obtain fiduciary status, PTE 2020-02 may be available.  Rollovers, annuity sales and other one-time transactions can now all create fiduciary status that requires compliance with one of the PTEs and the impartial conduct standards.

Text for Rollover Status Under the Old Five-Part Test

Under the now-void five-part test, all five prongs of the test must be satisfied for the advisor to be an investment advice fiduciary under the DOL definition. Advice to execute a rollover transaction can potentially be an isolated event that would not satisfy the “regular basis” component of the five-prong approach. On the other hand, rollover advice can be given as a part of an ongoing relationship between client and advisor, or an anticipated future ongoing relationship between the parties.

Further, determining whether there is a “mutual understanding” between the parties is based upon the reasonable understanding of both parties—even if no formal agreement is found. In fact, the DOL notes that advice to roll over plan assets is often given for the purpose of establishing an ongoing relationship where advice is provided on a regular basis outside of the plan (in return for a fee/commission). In other words, the rollover advice can be the first step in an investment advisory relationship that continues on a regular basis.

The exemption requires financial firms and advisors to document the reasons for recommending the rollover, including why the rollover is in the client’s best interests.