October 2021

What a Financial Institution Should Know About PTE 2020-02 and
Other DOL Statements About Rollovers

We at CWF are starting to get more questions about PTE 2020-02. The title of this PTE is, “Improving Investment Advice for Workers and Retirees.” On December 18, 2020, the DOL adopted PTE 2020-02. It became effective as of February 21, 2021. It is effective now.

The DOL has also issued new guidance regarding rollovers. This new guidance is complex and confusing. The DOL changed the rules so that more individuals are defined to be investment advisers and so PTE 2020-02 must be used to gain exemption relief for many rollovers.

There are two types of DOL guidance. The PTE provides for formal guidance. Most of the other DOL guidance is interpretative and so its authority is unsettled.
The DOL has determined that certain rollover guidance which it had given in 2005 is wrong and has been changed. The DOL had issued guidance that recommendations to withdraw funds from a plan and to roll it over to an IRA was not investment advice because the withdrawn funds were no longer plan funds. The DOL has changed its position. It now believes the withdrawn funds are still to be considered to be plan funds and so the DOL has repealed this prior guidance. Advice to roll assets out of a plan is advice as to the sale, withdrawal or transfer of plan assets, and therefore, is fiduciary advice assuming all of the requirements of the 5 part definition are satisfied. Therefore, new rules apply when determining if a person is an investment adviser and a fiduciary.
The DOL has redefined when a person will have met the regular basis requirement. The DOL acknowledges that a one time withdrawal will not meet the regular basis requirement The DOL decided by expanding the transaction time frame that this regular basis requirement will still be met if there had been an on-going relationship between the individual and the adviser prior to the distribution or there is clear evidence that after the rollover there will be a future ongoing relationship between the individual and the adviser.

A rollover into an IRA may come from either an employer sponsored plan (a Title I plan) or from an IRA The employer sponsored plan may either be a Title I plan or a non-Title I plan.

Financial institutions acting as an IRA custodian/trustee are asking, in order for us to accept a rollover contribution are we now required to document the reasons that a rollover recommendation is in the best interest of the retirement investor and provide that documentation to the retirement investor?”

A financial institution may choose to provide such documentation, but this is required only if a financial institution needs to comply with PTE 2020-02. In many situations a financial institution will not need to use PTE 2020-02 or will choose to not use the PTE for costs reasons. A financial institution may continue to use its standard rollover/direct rollover and transfer procedures.

CWF has two administrative forms (65-AD and 65-ID) which you may use with respect to a rollover from an employer plan. We have PDF versions available. These form use a check list approach where both the individual and the IRA custodian/trustee may complete the form to determine what is in the best interest of the individual. We have recently created a similar form where the individual will complete the form to explain the person conclude it was in their best interest to rollover or transfer their IRA funds from their current custodian to a successor custodian. The individual and the successor will complete this form. Use of these forms is optional. They can be used to show a financial institution is trying to comply with these new complex rollover rules.

As a practical matter at the current time, CWF believes a financial institution does not need to make major changes to its rollover/direct rollover procedures when funds are moving from an employer plan to an IRA and in its transfer/rollover procedures when funds are moving from another IRA to an IRA.

With respect to funds coming from an employer sponsored plan, there can be two situations. The first situation is, the retirement investor chooses on their own to withdraw funds from the employer plan and rollover the funds into an I RA Since there is no rollover recommendation, there is no prohibited transaction (PT) concern. An IRA custodian/trustee wants to have the individual furnish it with a copy of the section 402(f) notice which the employer furnished the individual and/or have the individual complete a rollover certification form. The individual must have an IRA and the individual will normally instruct how these funds are to be invested by the IRA custodian/trustee. The financial institution will furnish a comprehensive explanation of its fees. In many cases the financial institution will make no investment recommendation. The individual will make this decision. If the person’s IRA will be a “managed” IRA and the IRA trustee makes the investment decision, the IRA trustee will under standard practice explain the investments it makes and furnish a comprehensive discussion of any fees and the services it will be performing. The fees charged by an IRA custodian/trustee must always be reasonable.

The second situation is, the financial institution or its employee or affiliate does make a rollover recommendation. There is now a prohibited transaction (PT) concern and there would need to be compliance with PTE 2020-02 or another exemption. The law is unclear whether the exemptions provided by Code section 4975(d)(4) or (d)(6) would apply to a rollover transaction. CWF believes these two exemptions would apply. Code section (d)(4) provides an exemption when all or a part of the IRA assets are invested in deposits which bear a reasonable interest rate offered by the bank or other financial institution if such bank or other institution is supervised by the US government or a state, is a fiduciary and if the plan agreement expressly authorizes such an investment. Code section (d)(6) provides an exemption for certain ancillary services such as servicing a rolled over IRA. Certain requirements must be met. The bank or other financial institution must be a fiduciary. Any fee charged must be reasonable. The service must be in the best interest of the IRA account holder. There must be internal safeguards.

With respect to funds coming from another IRA via transfer or rollover, an IRA custodian/trustee wants to have a signed transfer form or have the individual furnish a rollover certification form. The individual must have an IRA and the individual will normally instruct how these funds are to be invested by the IRA custodian/trustee. The financial institution will furnish a comprehensive explanation of its fees. In many cases the financial institution will make no investment recommendation. The individual will make this decision. If the person’s IRA will be a “managed” IRA and the IRA trustee makes the investment decision, the IRA trustee will under standard practice explain the investments it makes and furnish a comprehensive discussion of any fees, including its own fees which must be reasonable.

Should the IRS or the DOL have primary responsibility for the administration of IRAs?

We at CWF admit our bias. It should be the IRS and not the DOL.

There are IRS rules for rollovers and direct rollovers from an employer plan to an IRA. There are other IRS rules for rollovers and transfers from one IRA to another IRA The IRS rules deal with how and when distributions will have to be included in income and the person must pay the associated tax liability. The IRS has never discussed “investments.”

The DOL is very concerned about investments within employer sponsored plans. Within the last 10 years the DOL has indicated it has concerns about IRA investments.
The stated purpose of PTE 2020-02 is - because this exemption expressly provides relief for a variety of transactions and compensation that may not have been provided by prior exemptions there should be an increase in the quality of investment advice provided to retirement investors. The PTE requires that such advice must be in the best interest of a retirement investor.

The major change is - PTE 2020-02 authorizes that a financial institution is able to receive compensation from a third party if there is compliance with PTE 2020-02. Such compensation may be commissions, revenue sharing, 12b-1 fees, sales loads, and mark-ups and down in certain principal transactions.

Some financial institutions may conclude PTE 2020-02 gives it a new business opportunity for increasing our revenues. The law may be complicated, but there are now new possibilities for the financial institution to earn some fee income with respect to the IRAs it services. A fee (reasonable) may be charged for making the rollover recommendation and assisting with the rollover or direct rollover into an IRA.
The DOL has issued additional guidance regarding PTE 2020-02 and rollover situations. This guidance is less authoritative than a PTE or a regulation, but it does set forth DOL’s stated position as being - there will be situations when “recommendations to roll over assets from an employee benefit plan to an IRA will be considered fiduciary investment advice.” The determination is complicated. It must be determined case by case.

The DOL also believes that there will be situations when recommendations to roll over assets from an IRA to another IRA will be considered fiduciary investment advice. However, the DOL’s discussion is very limited regarding IRA to IRA rollovers or other movements. The DOL has not even discussed whether a “transfer’’ is to be considered a rollover for purposes of this investment advice rule.

The authority the DOL has with respect to IRAs is very limited. The DOL’s only IRA authority derives from the laws for prohibited transactions and the exemptions for prohibited transactions. The DOL has the authority to define if a prohibited transaction has occurred and if an exemption applies.

With respect to IRAs, the DOL does not have the authority to directly penalize an IRA trustee or an IRA investment adviser or an IRA accountholder. It must inform the IRS that a prohibited transaction has occurred and then it is up to the IRS whether any tax penalties will be imposed on the party who caused the prohibited transaction. In CWF’s opinion, this will occur infrequently. The IRS tends to struggle with administering the prohibited transaction topic.

The IRS has furnished substantial guidance as to what information an employer sponsoring a retirement plan must furnish a person who is eligible for a distribution. The employer by law is required to furnish a section 402(f) notice. It must explain the applicable tax rules. The IRS or the law has never required there be any discussion of “investments.”

The IRS has issued no similar disclosure requirement when IRA funds are withdrawn or transferred. IRS guidance for transfers is limited. The IRS has not even defined what is required to have a transfer. A person who withdraws funds from an IRA may or may not decide to make a rollover contribution.

For many financial institutions, this is a non-issue because it (or its personnel) never makes an investment recommendation. That is, the individual makes the investment decision.

Many banks and other institutions acknowledge they are a fiduciary. However, current law does NOT define as well as the DOL thinks it should what tasks that fiduciary must perform. The DOL wants to impose its own definition of what tasks an investment adviser fiduciary must perform.

Time will tell how the banking regulators will be influenced by the DOL’s guidance. We at CWF think the banking regulators should adopt their own rules, but that may not happen. The banking regulators should have adopted a long time ago guidelines for assisting with rollovers. Banks should be following the guidance of its regulators rather than the DOL.

The DOL wants to use its legal powers to influence the great amount of money or assets moving from employer sponsored plans into IRA accounts. There are more funds in IRAs then in employer sponsored plans. The DOL has substantial authority over investments made under employer sponsored plans. The DOL wants the authority to be able to hold an IRA custodian/trustee or an affiliate or other investment adviser accountable. The DOL is trying to expand it powers. The DOL’s problem is – current law does not expressly authorize the DOL to do what it wants to do with respect to IRA funds.

In CWF’s opinion, Congress should enact new legislation restricting the role of the DOL with respect to IRAs. The DOL exists to assist employer/employee relationships. Let the IRS administer IRAs. If the IRS needs additional personnel, Congress should authorize it.

All concerned parties will need to watch to see how this “rollover” and fiduciary topic develops. The DOL may well decide that PTE 2020-02 is inadequate. The DOL may decide to rewrite one or more of its regulations. The DOL has stated, “While the Department intends to revisit PTE 2020-02 and other exemptions relating to advice, the Department believes that core components of PTE 2020-02, including the Impartial Conduct Standards and the requirements for strong public policies and procedures, are fundamental investor protections which should not be delayed while the Department considers additional protections or clarifications.” This article has not addressed the SEC’s best interest rule and its impact on rollovers and transfers. That is a topic for another article.

Compliance With PTE 2020-02

Requirements to be met by a financial institution if it elects to use PTE 2020-02.

1. Advice must be given pursuant to the Impartial Conduct Standards.

A. The advice must be in the best interest of the retirement investor.

- The following prudent standard of professional care applies. Such advice reflects the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances and needs of the Retirement Investor.

- The following loyalty standard of professional care applies: the advice provider cannot place their own interests or the interest of any employee or affiliate ahead of the interests of the Retirement Investor

B. All compensation must be reasonable and when applicable, comply with federal securities laws regarding best execution; and

C. Make no misleading statements about a relevant matter.

2. The adviser must acknowledge in writing their fiduciary status under Title I and the Code as applicable and they must explain what services are to be provided and describe if there are any material conflicts of interest.

3. Must adopt written policies and procedures to ensure compliance with the Impartial conduct standards and which will mitigate conflicts of interest.

4. Conduct an annual review to determine if the procedures are being followed and are working.