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What PTE 2020-22 Means for Consultants

In the same month, Department of Labor Prohibited Transactions 2020-02 (PTE 2020-02) became effective. This regulation increases fiduciary checks placed on IRA rollovers and other transactions involving retirement accounts.

Like fashion, sometimes the rules hold back. In this instance, the DOL reinstated a five-part test under its 1975 regulation that defines who is an “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974 and Section 4975 of the Internal Revenue Code. When the DOL’s 2016 fiduciary rule was reversed in 2018, a five-part exam became necessary. Essentially, this test makes a firm or advisor an investment assistant if they are compensated for:

  1. giving advice or recommending securities
  2. we have regular basis
  3. by mutual consent
  4. which serves as the primary basis for investment decisions, and
  5. Advice a plan or IRA . is personalized to the special needs of

PTE 2020-02 is seen as an extension of who is a fiduciary, because prior to its issuance, many advisors would disallow fiduciary status with disclosure if rollover occurs. Initially, DOL established a non-enforcement transition period for PTE 2020-02 from February. 16 Until December 20, 2021. This provided a window for consultants and firms to put in place the necessary procedures to comply with the regulation. Based on feedback from various industry participants, on October 25, DoL issued Field Support Bulletin 2021-02, which extended the non-enforcement period to January. 31, 2022, for all requirements except documentation and disclosure for participants, which was extended to June 30, 2022. It provided some breathing space for the procedures to get underway, but didn’t change the sense of urgency we’ve seen most. of our customers and prospects. Notably because the DOL has also announced that it plans to make further changes to the fiduciary rule, potentially leading to a five-part test to determine fiduciary status.

401(k) plan investment expenses are typically less than an IRA, and are heavily focused on regulatory fees. It is not surprising that DOL has prioritized fees with PTE 2020-02 as an important criterion when rollover is considered. In addition to fees, the DOL provides guidance on other criteria that should or may be considered when considering rollovers or account transfers.

From our experience engaging customers and prospects on potential PTE 2020-02 solutions, we have received some interesting feedback.

  1. About 10% of the firms we spoke with were not aware of PTE 2020-02 until we brought it up

Most of the people completely unaware were small in terms of workforce and assets under management. Many small to medium-sized firms we spoke with have very strong in-house “wealth” vs. “Retirement” compliance resource, which helps explain the lack of awareness with this new retirement-focused regulation.

  1. A handful of firms we spoke with initially shared with us that they all hope to address IRA rollovers with an “education-only” approach.

While the DOL still allows negotiation and material to be provided without recommendations that avoid advisors taking fiduciary status; Most believe that the five-part test described above will be hard to avoid. It is much easier to justify a large rollover from a new client as a mere education versus the smaller rollover associated with an existing client. Making a comprehensive decision to handle all IRA rollover opportunities as education can expose firms to greater regulatory scrutiny. A few firms told us months ago that they were pursuing education-only have now decided on a hybrid approach, employing PTE 2020-02 requirements for most rollovers and selectively education-only depending on the circumstances. use the approach.

  1. Firms are clearly embracing the fee benefits of 401(k) plans and giving them too much weight in an effort to reduce regulatory scrutiny.

Understanding the DOL’s strong focus on fees, several firms we’ve spoken with are calling the low fees of 401(k) plans as a starting point with each analysis. These firms will only allow their advisors to recommend rollovers if the totality of other criteria (services available, investments available, etc.) exceeds the 401(k) fee benefit. They expect and expect that fees, one of the primary concerns of regulators, will reduce compliance risks.

  1. data concerns

While plans are required to share fee disclosures with participants on an annual basis, the experience of our clients is that when considering rollovers, plan participants often face challenges in presenting those disclosures to their advisors. have to do. PTE 2020-02 allows alternative benchmarking data to be used in instances in which the DoL has cited the most recent 5500 filing as a source. Timeliness, accuracy and completeness are quoted by our clients and prospects using 5500 data, creating demand for alternate source.

In recent years, we have seen individual states push for more reliable monitoring of advisors. If the federal government does not persist, the states will; It is clear that fiduciary regulation and scrutiny is here to stay. We have seen many firms taking advantage of this inevitable trend to educate customers and differentiate themselves from the crowd. Fiduciary positioning is fast becoming a business development strategy.

John Faustino is Broadridge’s Head of Fiduciary Certification and Training Solutions.

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