The landscape of the Department of Labor (DOL) fiduciary rule has seen significant changes in recent years, with ongoing debates and legal challenges shaping its implementation. In May 2023, the DOL dropped its appeal of a Florida case, leading to a notable shift in the documentation and records requirements for rolling customer assets from an Employee Retirement Income Security Act (ERISA) plan to an Individual Retirement Account (IRA). This blog aims to provide an interpretation of the recent developments, clarifying the obligations for advisors and shedding light on the impact of the Florida court order. By understanding these changes, advisors can navigate the evolving regulatory environment more effectively and provide informed advice to their clients. Let’s delve into the details.
Interpretation of the DOL’s Recent Actions
Following the withdrawal of the DOL’s appeal in a Florida case in May 2023, our analysis indicates that the documentation and records requirements for rolling customer assets from an ERISA plan (such as a 401(k), 403(b), or pension plan) into an IRA, which you intend to manage as part of an ongoing customer relationship, no longer necessitate the completion of the full documentation as outlined in PTE 2020-02.
However, if you are the advisor of the 401(k) plan in question, it remains imperative to adhere to the full requirements of the DOL’s Prohibited Transaction Exemption 2020-02 (referred to as the “Exemption”). Additionally, we interpret the recent Florida case to have no impact on the existing obligations to follow the Exemption for IRA-to-IRA transfers.
History of the DOL Fiduciary Rule
- 1974 — Employee Retirement Income Security Act (ERISA) is enacted.
- 1975 —DOL adopted the 5-part test to identify when ERISA fiduciary duty applies. Specifically, the “fiduciary” definition becomes applicable only to financial advisors who provide advice to a “plan” on a “regular basis.”
- 2010 — Dodd-Frank Wall Street Reform and Consumer Protection Act is signed into law, including a provision requiring DOL to determine whether there is a need for investor protection rules to be strengthened.
- 2011 — DOL issues a report finding that investors are not adequately protected from conflicts of interest by brokers and investment advisors advising retirement plans.
- April 2015 — President Obama directs DOL to propose a rule requiring financial advisors advising retirement plans to act as fiduciaries.
- April 2015 — DOL issues its proposed rule, which receives more than 300,000 public comments.
- April 2016 — The new DOL rule is finalized, to take effect in April 2017.
- May 2017 — President Trump signs executive order directing federal agencies to review and repeal any regulations deemed harmful to the economy, delaying the DOL fiduciary rule until June 2019.
- December 18, 2020 — DOL adopts the Exemption, intended to subject all rollover recommendations by advisors to the ERISA “fiduciary” definition, by expanding the definition of a “prohibited transaction” to include any recommendation for rolling over ERISA plan or IRA assets into an IRA, when doing so would increase the compensation for the advisor.
- February 2021 — The Exemption becomes effective, with transitional relief through December 2021.
- January 2022 — The whole DOL fiduciary rule, including the Exemption, takes effect.
- June 30, 2022 — The DOL fiduciary rule and Exemption become subject to full enforcement.
- February 13, 2023 — Florida district court issues an order setting aside a provision that an ERISA “fiduciary” definition only applies to advisors who provide advice to an ERISA “plan” on a “regular basis,” consistent with the 1975 act.
- Soon thereafter, DOL files an appeal challenging the court’s order, prompting a stay of the Florida court’s order and keeping the Exemption in effect.
- May 16, 2023 — DOL announces that it has withdrawn the appeal, allowing the Florida court’s order to stand. The Florida court’s February 2023 order becomes a final order invalidating an important interpretation of the DOL’s new rule and reestablishing “fiduciary” as applicable only to advisors who provide advice to an ERISA “plan” on a “regular basis.”
The ERISA Fiduciary Rule
The ERISA fiduciary standard differs from the fiduciary duty that’s applicable to all registered investment advisers. Under the ERISA statute, an adviser who satisfies its definition of a “fiduciary” is prohibited from engaging in certain activities, such as dealing with the assets of the plan in the advisor’s “own interest or for his own account,” or “receiv[ing] any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.” Accordingly, the statute would prohibit an investment adviser considered a fiduciary under ERISA from recommending that plan assets be rolled over into an IRA or other account that the investment adviser charges to manage unless the adviser satisfies an “exemption” to the prohibited transaction rule, such as the Exemption. To satisfy the Exemption, the investment adviser must document “impartial” advice to the customer in order to roll over the plan assets into an IRA.
In issuing the Exemption, the DOL issued a number of interpretations — called “Frequently Asked Questions” (“FAQs”) — which were intended to provide investment professionals with examples of how the new rule would apply. Specifically, DOL FAQ Number 7 explained that advisers advising a customer to roll assets out of an ERISA plan such as a 401(k) or an employee benefit plan, into an IRA, would come within the definition of an ERISA fiduciary and thus require compliance with the Exemption.
This includes instances where:
- the adviser has been giving advice to the individual about investing in, purchasing, or selling securities or other financial instruments through tax-advantaged retirement vehicles that are subject to ERISA or the Code, and the advisor recommends a rollover of assets out of the ERISA plan or IRA managed elsewhere into an IRA managed by the adviser; and
- when the adviser has not previously provided advice to the individual but expects to regularly make investment recommendations regarding the IRA as part of an ongoing relationship.
Accordingly, FAQ Number 7 indicated that the DOL’s interpretation prescribed that an adviser’s recommendation that a new or existing customer rollover assets from an ERISA plan to an IRA under his or her management subjects that adviser to the additional requirements of an ERISA fiduciary and thus requires compliance with the Exemption.
Florida Court Order Invalidates FAQ No. 7
On February 13, 2023, a Florida court issued its order invalidating FAQ Number 7, in the case of American Securities Association v. US Department of Labor. In the court’s order, it noted that, as dictated by the 1975 act, the ERISA fiduciary definition only applies to advisers who provide advice to an ERISA “plan” on a “regular basis.”
The court concluded that the DOL’s interpretation in FAQ Number 7 would apply the ERISA fiduciary definition to financial advisers who do not provide advice to an ERISA plan on a regular basis but advise a participant in the plan to rollover assets, out of the plan and into an IRA managed by the adviser. Such application of the ERISA fiduciary definition was inconsistent with all prior interpretations of the ERISA statute and was therefore invalid and unenforceable. In so holding, the court determined that one-time advice to a customer to roll over assets from an ERISA plan not managed by the adviser, to an IRA that is managed by the adviser would not constitute “regular” advice to a “plan,” and therefore, the advisor would not be subject to the heightened ERISA fiduciary duty and therefore not require the Exemption of PTE 2020-02.
So as a consequence of the order, unless the adviser has been advising the ERISA plan in question, recommendations from that adviser to rollover assets from that ERISA retirement plan to an IRA managed by that adviser, are not subject to the Exemption. In other words, if the adviser does not “regularly” advise the “plan” from which the assets are to be withdrawn, the Exemption does not apply.
While the DOL had filed an appeal challenging the court’s order, it announced on May 16, 2023, that it had withdrawn its appeal and will allow the Florida court’s order to stand. Therefore, the Florida court order, issued February 13, 2023, is now a final order, invalidating the important interpretation of the DOL’s new rule in FAQ Number 7.
So – What now?
From June 30, 2022, to May 2023, the requirement was to properly document and follow the guidance from the Exemption for all rollovers from ERISA plans or existing IRAs to new IRAs managed by you and your firm. However, now that the Florida court ruling stands, the scope of the Exemption is now narrower.
It is our interpretation, that after May 2023, the fiduciary, impartial advice, documentation, and records requirements for rolling customer assets from an ERISA plan to which you are not an advisor, into an IRA that you plan to manage as a part of an ongoing customer relationship, is no longer enforceable. Therefore, such transactions no longer necessitate the completion of the full documentation.
In regard to the existing requirements to follow the Exemption for IRA-to-IRA transfers, however, we interpret the recent Florida case to have had no effect. Because it did not address this issue, we must adhere to prior guidance that stated that the Exemption would apply. Accordingly, if you are rolling over an IRA that is outside of your management to an IRA under your management, the full requirements of the Exemption still apply. Additionally, if you are changing the account type of an IRA under your management — such as moving an IRA or assets within an IRA to a new account (e.g., brokerage IRA to managed account IRA, IRA to Roth IRA, or IRA assets into a new investment account for alternative investments), the full Exemption still applies, as well.
- When you’re rolling Plan assets outside of your management into an IRA under your management, the Exemption is no longer necessary.
- When you are the advisor for the ERISA plan and you recommend a participant of that plan roll over assets to an IRA under your management, the full requirements of the Exemption do apply.
- When you are executing any IRA-to-IRA transfer, the full requirements of the Exemption do apply.
- You manage some ERISA assets for Customer A, and you advise Customer A to move those ERISA assets to an IRA under your management — you are subject to the Exemption requirements.
- You manage a 401(k) plan for Customer B, and you advise Customer B to move 401(k) assets to an IRA under your management — you are subject to the Exemption requirements.
- You manage an IRA for Customer C, and you advise Customer C to move additional IRA assets to an IRA under your management — you are subject to the Exemption requirements.
- You do not manage Customer D’s ERISA plan, and you advise Customer D to move ERISA assets to an IRA under your management — you’re not subject to the Exemption requirements.
- Customer E has been a client for some time. However, you have not managed Customer E’s 401(k) assets in the past. Customer E is now ready to retire and move their 401(k) assets to an IRA at your firm and management. — You’re not subject to the Exemption, because it’s no longer deemed to be ERISA fiduciary advice.
- Customer F has an IRA that is managed by another advisor. Customer F is new to you, and you’re going to begin managing Customer F’s IRA. — You are subject to the Exemption, and it is our recommendation that you complete the required documentation for such clients. Because the ERISA fiduciary standard does apply and the Exemption is required to be met in order for you to charge a fee.
- Customer G has an IRA under your management. You recommend some or all of the IRA assets be transferred to another tax-qualified account then the Exemption applies if your firm receives any increase in benefit, including higher fees or lower costs incurred by or other advantages to the firm, (IRA to Roth IRA) (Brokerage IRA to Managed IRA).
Staying Ahead of the Curve with AdvisorLaw
Since the inception of ERISA in 1975, the DOL has continued to attempt to make changes to its definition of an ERISA fiduciary, and its rule changes have been consistently challenged by the courts. To say it has been a rollercoaster of a process would be an understatement. The recent developments surrounding the DOL fiduciary rule have resulted in a notable shift in the documentation and records requirements for rolling customer assets from an ERISA plan to an IRA. While the full requirements of the DOL’s Prohibited Transaction Exemption 2020-02 still apply for advisors of 401(k) plans and IRA-to-IRA transfers, the recent Florida court order has invalidated the requirement for advisors who do not regularly advise an ERISA plan to complete the full documentation for rolling assets from an ERISA plan to an IRA under their management.
Our experienced RIA compliance team is well-equipped to assist RIAs in understanding and adapting to the new DOL change regarding documentation and records requirements for rolling customer assets from an ERISA plan to an IRA. We recognize that the recent Florida court order has invalidated the full documentation requirement for advisors who do not regularly advise an ERISA plan, but the full requirements of the DOL’s Prohibited Transaction Exemption 2020-02 still apply for advisors of 401(k) plans and IRA-to-IRA transfers.
Our knowledgeable RIA team can provide comprehensive guidance on how these changes impact your specific business. We can help you interpret the new requirements, assess your current compliance practices, and develop strategies to provide continued adherence to the evolving regulations.
Moreover, we understand that the regulatory landscape is subject to further changes and uncertainty in the future. By partnering with AdvisorLaw, you gain access to our expertise and ongoing support to navigate these complex regulatory challenges. We keep you informed of the latest developments, provide timely updates, and offer proactive solutions to help you maintain compliance while serving the best interests of your clients.
If you require further clarification or would like to discuss how these changes may affect your business, we encourage you to reach out to AdvisorLaw’s RIA team today. Our dedicated professionals are ready to assist you and provide the guidance you need to successfully navigate the intricacies of the regulatory environment.
Contact us today for a complimentary consultation.
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