The U.S. Department of Labor’s (DOL) Prohibited Transaction Exemption 2020-02 (PTE 2020-02), Improving Investment Advice for Workers & Retirees has been in effect for more than a year. However, enforcement of the requirement to provide investors in writing of the specific reasons why a rollover recommendation is in their best interest has been deferred until July 1, 2022.

The DOL’s PTE 2020-02 states that “Prior to engaging in a rollover recommended pursuant to the exemption, the financial institution provides the documentation of specific reasons for the rollover recommendation, required by Section II(c)(3), to the retirement investor.”

This article summarizes key regulatory guidance for meeting the best interest disclosure requirements when making a rollover recommendation.

 

Guidance from the US Department of Labor

In April 2021, the DOL issued an FAQ that provides guidance on factors to consider to meet the best interest disclosure requirements:

• Make a diligent and prudent effort to obtain all relevant information: Financial professionals and firms must make diligent and prudent efforts to obtain information about the existing employee benefit plan and the investor’s interests in it, as well as document and explain the assumptions used and their limitations.
• Consider all relevant factors: This includes the alternative of leaving the money in the retirement investor’s employer plan, the fees associated with both plans, whether the employee pays for some or all of the plan’s administrative expenses, and the different levels of services and investment available under the plan and the individual retirement account (IRA).
• Review the impact of costs: Financial professionals must consider the long-term impact of increased costs and consider why the rollover may be appropriate notwithstanding any additional costs.
• Consider available services: Financial professionals must obtain detailed information about the services available within both the existing and proposed retirement plans and determine the relative importance of these to the individual retirement investor.
• Determine the impact of economically significant features: This includes features such as surrender schedules, index annuity caps, and participation rates.

 

Guidance from the US Securities and Exchange Commission

On March 30, 2022, the Securities and Exchange Commission (SEC) issued a staff bulletin “reiterating the standards of conduct for broker-dealers and investment advisors when they are making account recommendations to retail investors.” It includes clarification on the factors to consider for best interest rollover recommendations:

• Consider all potential costs of the current and proposed plans, including direct and indirect costs: While there is no obligation to recommend the least expensive account type, “there must be a reasonable basis to believe that the account recommendation is in the investor’s best interest.”
• Consider other factors alongside costs: This includes the investor’s need for certain services or certain types of investment products or strategies; the account’s characteristics, including any special or unusual features requested by the retail investor, such as tax advantages; the anticipated composition of investments in the investment account; available investment options; the ability to take penalty-free withdrawals; the application of required minimum distributions; protection from creditors and legal judgments; and holdings of employer stock. The existence of special features or other potential benefits would not alone support a reasonable belief that an account recommendation is in an investor’s best interest. Rather, they should be considered in light of the investor’s needs, investment objectives, and preferences.
• Consider the alternative of leaving the investor’s investments in their employer-sponsored plan: As outlined by the SEC, “it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest…if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option.”

 

Intuitive Technology to Analyze, Document, and Disclose Rollover Recommendations

Obtaining the relevant information and asking the appropriate questions can be challenging and time-consuming. InvestorCOM RolloverAnalyzer is a cloud-based application specifically designed to help financial professionals gather the required information; automatically download required cost data (including both employer-sponsored plan cost data from the Form 5500 database and investment benchmark data for the recommended plan); and compare a rollover recommendation against cost, service and fit criteria.

RolloverAnalyzer provides a two-dimensional analysis by scoring the service and fit considerations against the investor’s preferences. RolloverAnalyzer helps to ensure a consistent and unbiased firm-wide approach for rollover recommendations.

 

Sign up to see a demo of RolloverAnalyzer today.