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DOL Official Sheds Light on Rollover Recommendations

Regulatory Agencies

Cautioning those looking to “game the system,” a senior Labor Department official affirmed July 27 that suggesting investments that could occur after a rollover is tantamount to recommending the rollover, and if it meets the rest of the five-part test will constitute fiduciary advice regardless of how it’s phrased. 

Tim Hauser, Deputy Assistant Secretary for National Office Operations at the Department of Labor’s Employee Benefits Security Administration, spoke with ARA CEO Brian Graff at the 2021 NAPA DC Fly-In Forum on everything from implementing the 2020-02 Prohibited Transaction Exemption that provides a pathway for investment fiduciaries to be able to work with both participants and IRA holders to the recent guidance on cybersecurity best practices.

Key Takeaways

  • Suggesting investments that could occur after a rollover is tantamount to recommending a rollover, and if it meets the rest of the five-part test will constitute fiduciary advice, regardless of how it’s phrased. It doesn’t require the “magic words.”
  • Rejection of the Deseret letter was the Labor Department’s attempt to “level the playing field” between advisors outside the plan and plan advisors with regard to rollovers.
  • “Regular” basis at present isn’t a function of frequency, but rather a reasonable expectation of an ongoing relationship.
  • A revisit of the fiduciary rule is on the agenda, but it would follow a notice and comment period.

Rollover Recommendations

In discussing PTE 2020-02 and what constitutes a rollover recommendation, Hauser warned advisors to not try to “game the system.” Graff noted that he’s been getting a lot of questions about this issue and at what point do advisors cross into what would constitute making a recommendation, particularly if they provide, for example, standardized disclosures and discuss the pros and cons of a rollover, but don’t actually say the “magic words.”

“First, I’d say is that our goal really is for advisors to keep their focus on making recommendations that are in their retirement investor’s best interest, rather than looking for ways to avoid the requirements associated with rollover recommendations, so I’d urge people not to try to game it,” Hauser noted. He explained that the basic test of whether or not someone is giving advice is the five-part test incorporated in the 1975 regulation, noting that if you meet the requirements of that test, then you’re giving fiduciary advice—whether specifically recommending a rollover or telling a participant what they should do with the money in their plan account. 

Hauser emphasized that you’re going to have to adhere to the duties of prudence and loyalty and acknowledge your fiduciary status. But if the goal in wordsmithing the positioning is to avoid complying with the documentation requirement, the DOL official warned that you’re “running a risk of not complying with the exemption and not having the benefit of the exemption.

“If you’re getting fees that need an exemption, I urge people not to take that approach, and I don’t really think it would be successful. And I don't think that kind of strategy—a ‘wink and a nod’... is going to work,” Hauser cautioned. 

Deseret Letter

When asked by Graff about the repeal of the Deseret letter in the exemption, Hauser explained that it was a way to level the playing field. The Deseret letter previously held that a standalone recommendation by an advisor outside the plan to a plan participant to roll over their account from the plan to an IRA was not, by itself, considered advice under ERISA. 

“It’s awfully hard to see how a recommendation to take money out of your plan could be anything other than investment advice,” Hauser commented. He explained that such a move would transform the legal rights associated with the assets, as well as the fee structure, and even the potential investments. “You’re literally extinguishing a set of property rights that the participant has with respect to the plan and suggesting that they convert them into another kind of property and service relationships, so it’s clearly investment advice,” Hauser explained. 

Documentation Requirement

In regard to what constitutes a rollover recommendation and concerns over the need to provide participants with a comparison of fees between a plan and the proposed IRA, Hauser emphasized the importance of upholding fiduciary obligations in relying on the exemption. 

In relation to questions about difficulties advisors might have in obtaining plan fee structures, Hauser suggests that it shouldn’t be too hard for people to get that information, noting that there are mandatory disclosures to plan participants and they should be able to give you ready access to those disclosures, and you should be able to look at them and make meaningful comparisons. “I don't know how you would make a sound recommendation to somebody without at least considering where their money is right now, what the options are available to them under the plan and what the fee structure and the light looks like,” he emphasized. 

Regular Basis Standard

Turning to the regular basis standard under the five-part test, Graff inquired about what constitutes a regular relationship and whether, for example, it’s an annual checkup or some other regular communications. Hauser noted that while there was no reference to frequency of contact in establishing “regular,” and thus no “bright line,” he pointed to the expectation of having an ongoing relationship. 

“I think rather the way to think about it is that, if you already are regularly giving advice to somebody, you have that kind of relationship. But it can also be the case that you’re making a recommendation, for example, to roll money out and you have an expectation that you’re going to be continuing to make recommendations, give advice and have this kind of professional relationship post-rollover—the essential point we made in the preamble to the 2020 exemption was that that’s good enough…. relationships have a first step and a first communication and if that’s what’s going on, you’re going to satisfy the test.”

Hauser further noted that one of the things they will be looking at with possible changes to the rule is the regular basis requirements itself, because it does pose these kinds of “vexing, interpretive issues” that don’t track readily to the language in the statute.

Revisiting the Fiduciary Rule

As to revisiting the fiduciary rule, Hauser noted that the DOL will be looking at whether to amend a number of preexisting exemptions that were not amended when they created the new exemption. The DOL also didn’t amend the 1975 rule, which was effectively reinstated as a result of the 5th Circuit opinion. 

“The logical question remains: Should we go back and make some changes to that fiduciary definition, maybe to bring it more in line with the way the advice world and investment relationships are currently structured? And should we import some of the conditions that are in the 2020 exemption into some of the other exemptions? Are there some ways in which we should tweak or change the 2020 exemption? If we do any of those things, it will be with respect to all of them,” Hauser said, albeit under a regular notice and comment period. 

Coming Tomorrow—Cybersecurity...